I hate to break it to you, but growth generated though share buybacks won't last forever. That's the tough lesson that ExxonMobil (XOM 1.42%) investors are learning these days. Shrinking production is now forcing the company to shave its quarterly buyback program as the recent drop in oil prices is causing earnings growth to slow.
In its recently reported first-quarter earnings, Exxon produced earnings of $9.5 billion. That's a whole lot of money; however, it represents earnings growth of just $50 million from the same quarter last year. That's anemic growth of 1%, yet, because Exxon is an expert at repurchasing shares, its earnings growth appears much higher. The company's $5 billion of share repurchases in the quarter helped increase earnings per share by 6% over last year.
The big sore spot in the quarter came from oil-equivalent production, which slipped 3.5%, though excluding certain impacts, the production decrease was just 1.2%. This came despite the company's spending $11.8 billion on capital and exploration projects. That's up 33% from last year, though it does include the company's $3.1 billion acquisition of Celtic Exploration, which, if backed out, meant the company spent only $8.7 billion on exploration against $8.8 billion in the year-ago quarter.
ExxonMobil has been struggling to grow its production in a meaningful way for a few years now. However, on a per-share basis, the company's production growth has been industry leading, thanks to its steady buybacks. Over the past five years, each share has an interest in 21% more production, which is an annualized growth rate per share of 5%. As the following chart shows, ExxonMobil easily outpaces Chevron (CVX 1.42%), Royal Dutch Shell (NYSE: RDS-A) and BP (BP 1.84%):
Source: ExxonMobil investor presentation.
The only problem is that production growth per outstanding share can't be maintained through buybacks forever. Lack of real production and earnings growth has the company reducing second-quarter buybacks by $1 billion from the most recent level of $5 billion. Shareholders might not remember the last time a pullback like this happened, as the company has been buying back an average of $5 billion a quarter since the end of the financial crisis.
That being said, the ExxonMobil empire is far from crumbling. Instead, the case can be made that ExxonMobil is a far superior investment because of how superbly it allocates its capital. Not only does the company outpace its peers when it comes to production growth per share, but it also beats these same peers which it comes to its return on capital employed:
Source: ExxonMobil investor presentation.
Looking ahead, total production is expected to be down about 1% this year as the company allows some of its natural gas production to decline. However, the company's investments in future production should yield a 2%-3% annual production growth through 2017. That's not bad, but it does trail many of its peers.
Exxon is calling for its daily production level to grow by only about 600,000 barrels of oil equivalent per day by 2017. That's about what Shell is expecting, though it's starting at a slightly lower base. Meanwhile, Chevron expects to grow its production by a million barrels of oil equivalent per day, and it's starting at a production base that's half of Exxon's.
The big difference here is that Exxon's growth will be very focused on the returns it will generate, instead of growth for the sake of growth. That could mean that its production growth targets might be missed in the future if the returns aren't there. So Exxon shareholders are learning a tough lesson: By not striving for growth at all costs, the company is in one sense struggling to find the production growth that meets its targets, which could cause earnings and therefore buyback activity to slip. However, this is a company focused on earning the best returns on capital it can, which is one reason it has grown to become one of the top energy companies in the world. So, when you think about it that way, it's really not so bad after all.
