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THE WALL STREET JOURNAL: Oil Giants Splurge for Investors: “With oil at nearly $51 a barrel, even after two straight days of declines, the oil giants have a problem lots of companies only dream about: What to do with all the cash?”: “After questions about its accounting for reserves earlier this year, Royal Dutch/Shell Group resisted share buybacks.”: “Mr. van der Veer then reversed himself, promising to buy back some $2 billion in shares this year.” (


Many Major Companies Make

Share Buybacks as High Prices

Leave Firms With Piles of Cash



October 29, 2004; Page C1


With oil at nearly $51 a barrel, even after two straight days of declines, the oil giants have a problem lots of companies only dream about: What to do with all the cash?


The seven largest Western oil companies are expected to generate $71.3 billion in free cash this year -- and that is after funding $78.1 billion in spending for new oil and natural-gas projects, according to John S. Herold Inc., an oil consulting firm.


To put that in perspective, the new "seven sisters," a term for the largest Western oil companies, could band together and buy eBay Inc. at today's share prices and still have some $6 billion in pocket change. By itself, Exxon Mobil Corp., which will generate an estimated $22.5 billion in cash this year, could snap up Apple Computer Inc.


Fortunately for investors, the oil companies aren't repeating their diversification campaigns of the 1970s, when Mobil Corp. bought Montgomery Ward and Occidental Petroleum Corp. acquired Iowa Beef Processors. Neither purchase worked out, and each oil giant ended up ditching its acquisition.




Compare the recent surge in oil prices with gains in gasoline, heating oil and natural gas. Plus, chart oil's advance towards $50. 


Nor are the oil giants likely to use their cash to gobble each other up as they did a few years ago when they formed Exxon Mobil and ChevronTexaco Corp., and BP PLC swallowed Amoco Corp. Consolidation always is more attractive when an industry is getting hammered -- not when it is making record profits. And regulators, especially in Europe, are likely to look dimly on liaisons that would give the oil giants even more refining and marketing muscle. A number of small U.S. oil companies have put themselves up for sale recently, but "now is not a good time" to be buying, says BP Chief Executive John Browne.


Instead, many are shoveling cash back to investors, increasing their dividends and buying back shares. They also are building up their cash reserves. The five largest oil companies spent 56% of their cash on dividends and share repurchases in the second quarter, well above the 31% spent between 1999 and 2003, according to an analysis by Houston Simmons & Co. International, a Houston energy investment bank.


One exception is ConocoPhillips, which aggressively has been using its cash to invest in Russian oil production. It recently announced it would spend $2.4 billion for an alliance with OAO Lukoil, the Russian oil giant, that includes a minority stake and a joint venture. Conoco disclosed that it could spend an additional $3 billion to increase its share in Lukoil over the next three years. If Russia turns out to be the next big source of oil for export, Conoco's roll of the dice will help it grow significantly. But its minority position in Lukoil could mean the fate of its investment is largely out of its hands.


And even ConocoPhillips is giving some of its riches back to shareholders. It increased its dividend by 16% to 50 cents a share each quarter.


Many investors are pleased by this approach. "I wouldn't want these companies to start spending...on projects that are marginally profitable in the current environment but wouldn't be profitable" if oil prices dropped, says Carlton Neel, senior portfolio manager for Phoenix/Zweig Advisers LLC, a New York mutual-fund manager that owned shares in French oil giant Total SA and in ConocoPhillips at the end of the second quarter.


One problem with the conservative approach: If oil companies fail to find new reserves, they will eventually pump themselves out of existence. And the major companies have struggled to grow their production in recent years.


For now, the oil companies are playing it safe. Total has bought back some 13% of the company. Robert Castaigne, Total's chief financial officer, says giving cash back to shareholders is a better use of funds than investing in capital-intensive projects that may not reap adequate returns. Despite high oil prices, "we remain very cautious to limit exposure in a risky country, to maintain our own criteria in terms of profitability," he said in an interview earlier this year.


BP, the world's second-largest publicly traded oil company by market capitalization, behind Exxon Mobil, bought back its own shares at a rate of more than two million a day, on average, over the first nine months of the year, spending $5.5 billion. By slicing the number of shares outstanding, BP, which sets aside a fixed amount for dividend payments, also boosted the payout to each shareholder by 8.8% for the period.


Exxon, meanwhile, has been amassing cash on its balance sheet and giving relatively less back to shareholders. After raising its quarterly dividend 8%, to 27 cents a share, in April, Exxon reported yesterday that at the end of the third quarter it had $20.7 billion in cash and $10.1 billion in debt. This is after buying back 157 million shares of its common stock in 2004 for nearly $7 billion, nearly half of that in the third-quarter alone. At the same time, its expenditures on finding and developing new oil and gas fields declined by 5.5% in the third quarter from a year earlier. Exxon promises to increase capital expenditures by an average of 3% through the end of the decade.


ChevronTexaco, which reports third-quarter results today, also is pursuing a share-buyback plan and is running ahead of a three-year plan to repurchase $5 billion of its shares. Investors are speculating that Chevron might enlarge its program.


After questions about its accounting for reserves earlier this year, Royal Dutch/Shell Group resisted share buybacks. Newly installed top executive Jeroen van der Veer defended the company's decision to use excess cash instead to pay out dividends, burnish its balance sheet and keep on hand in case of new investment opportunities.


Mr. van der Veer then reversed himself, promising to buy back some $2 billion in shares this year. Yesterday, however, Shell announced it was halting its buyback program to comply with U.S. securities laws as it proceeds to merge its two parent companies. Still, it has bought back some $1.7 billion in shares so far this year.


Buyback programs impose discipline on energy companies, investors say. Nikos Monoyios, senior vice president at OppenheimerFunds, which has substantial holdings in all major oil companies, is big fan of them. "We feel that even from a fundamental point of view, this is a very smart thing to do because it reduces re-investment risk," he said.


--Bhushan Bahree in New York contributed to this article.


Write to Russell Gold at

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