Dueling Fools
Exxon, Exxoff
February 3, 1999

Exxon Bear's Den
by Rick Munarriz ([email protected])

You don't have to be an energy guru to figure out why Exxon is in trouble. Next time you're filling up your gas tank, check out the overhead price sign. Cheap, cheap crude. Pump prices haven't been this low since 1986. Back then Exxon's shares were trading in the high teens. Why is this Exxon four times better?

It isn't.

The gasoline industry has taken a spill. Whoa there Fool, you don't want to light a match around here. Right now there are more than 200 million barrels of oil in surplus. That won't clear out anytime soon. Even with Iraq in check, OPEC production is far exceeding demand. Poor Jed Clampett. If he'd strike oil today he'd be moving out of Beverly Hills and back into his hillbilly digs.

Where does this leave Exxon? Desperate. It has taken Mobil hostage like a pair of hungry hefties at a foodless buffet. Is there really any kind of worthwhile synergy when a pair of commodity peddlers tie the knot? As the government takes a look at the proposed merger this month -- probably not to focus on anti-trust issues but rather anti-gravity matters as these two behemoths try to break each other's fall -- why even bother with a company for which the only thing bleaker than today is tomorrow.

Exxon's peers and affiliates have been announcing some pretty severe layoffs recently. Maybe it's just me, but when I was a kid tending to a lemonade stand and I sent some folks home, I wasn't expecting a rush for my liquid fuel anytime soon.

In 1997, Exxon earned $3.29 a share excluding charges. Earnings fell to $2.64 last year, the worst showing in four years. Now estimates for this year are in a wide range, which go as low as $2.35 a share. So, things can get worse. Like the Exxon Valdez, this company is between a rock and a hard place -- and I don't envy whoever gets tagged with cleanup duty.

The one thing the company was doing right last year, buying back shares, ended once the Mobil merger was announced. It didn't matter much anyway since the shares outstanding were so bloated that even with the now defunct repurchase plan going the company had 2.5 billion shares outstanding last year. It has 2.5 billion shares outstanding today.

Now, I know most investors never saw Exxon as a growth stock to begin with. Like so many high-yielding utility stocks of yesteryear, Exxon was for retirees who could just sit back and cash the quarterly checks. But there's great risk in thinking this conservatively. For starters, last year Exxon didn't hike its dividend at all. If earnings continue to fall, that payout might very well be trimmed rather than raised. Even as things stand, the paltry 2.2% yield is pathetic. While I never understood the logic in income investing, at least I know that real estate investment trusts (REITs) will best that a few times over. Gee, even a decent money market fund will double that interest income.

So why even consider Exxon? I hope Yi-Hsin didn't point to sector consolidation as a show of insider confidence. Just like British Petroleum's purchase of Amoco, this is the kind of inbreeding that occurs when both parties are so ugly that this becomes the only choice for survival.

Did I say survival? Well, let's not get too optimistic here. We're talking bubbling crude here, Jed. Black gold. How confident can a shareholder be that Exxon will be around for decades onward. I mean, this world is about innovation, no? And, just about every step forward is a step backward for Exxon. Automakers continue to push the envelope on fuel efficiency. Net result? Less demand. As we speak, Ballard Power <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BLDPF)") else Response.Write("(Nasdaq: BLDPF)") end if %> is teaming up with carmaking heavies Ford <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %> and Daimler-Chrysler <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DXC)") else Response.Write("(NYSE: DXC)") end if %> to roll out fuel cell powered vehicles. While they will initially run on methanol, in theory, they can one day run on water. Net result? No demand. Well, I guess there might still be some kind of market for corner stores vending overpriced beef jerky and pi�a colada air fresheners. Where would progress be without that I ask you?

But, before you brand me some Spacely Sprocket Spaz, this is not some battery-powered novelty car Ballard is working on either. It's real and the future is spectacular. In the years to come, big oil will continue to diminish in stature and necessity. Trust me, you're going to love to live in tomorrow, a time complete with cleaner and more efficient modes of transportation, all just five to seven years away from mass acceptance. You will love being there. You will also be particularly pleased if you avoided that Exxon oil slick along the way.