POOR LITTLE RICH COMPANY
On the back of $55 oil, Exxon Mobil has become one of the world's richest companies. And that's the problem.By Nelson D. Schwartz
By Nelson D. Schwartz

(FORTUNE Magazine) – EXXON MOBIL CEO LEE RAYMOND should be enjoying a victory lap right about now. But instead of celebrating the fact that surging energy prices have brought his company to within shouting distance of the top spot on this year's FORTUNE 500 (it's No. 2 again), the soon-to-retire CEO suddenly has a new anxiety: how to spend the windfall wrought by $55-a-barrel oil. By the end of April, Exxon will have a cash hoard of more than $25 billion. And if crude prices stay where they are, this geometrically growing bonanza could soon give Exxon more cash on hand than any other U.S. company.

It sounds like an enviable problem to have. But Raymond is facing increasing pressure to do what CEOs with extra cash typically do--splurge on a one-time dividend à la Microsoft or launch a mega-acquisition. The thing is, he's dead-set against both. (His memory is long enough to recall the boom-fueled acquisitions of the 1970s and early 1980s when Mobil made a ruinous foray into retail, buying Montgomery Ward; Exxon scooped up a maker of electric motors; and Occidental purchased Iowa Beef Processors--don't ask.) "First, we will not do anything stupid or silly," he barked when the subject came up at a meeting with analysts in New York City last month. "Secondly, don't expect us to take mechanistic or knee-jerk reactions. We will continue to take a patient, disciplined approach to how we manage cash."

Raymond's scolding intimidated the analysts--most steered clear of the topic during the Q&A that followed. But what Exxon does with its cash has implications far beyond Wall Street or the company's austere Dallas headquarters. At a time when domestic energy production is declining and drivers are paying a record $2.15 a gallon, American consumers, not to mention politicians, are likely to start focusing on whether Exxon is spending enough to find oil and gas. While Exxon is returning more money to shareholders via dividends and buying back more of its stock, its spending on drilling and other development activities actually declined slightly in 2004--even though crude prices jumped by a third.

At $15 billion annually, Exxon's cap-ex budget is huge, but it's not expected to rise sharply next year. In part that's because Raymond considers the current price of oil unsustainable. "You won't see our investment spending swing with changes in the near-term commodity prices," he told the analysts. But Raymond's pessimism stands in sharp contrast to competitors like ConocoPhillips and ChevronTexaco, which are beginning to open the spigot, with the latter's cap ex jumping 20%, to $10 billion, this year. "There's no question Exxon and others should be spending more," says Paul Gulden, manager of the Pax World Growth fund, which focuses on socially responsible investing. "Even from a shareholder perspective, not just a socially responsible one, they should be trying to find more oil and gas." What's more, as the largest independent energy company in the world (with daily production of more than four million barrels of oil and gas, Exxon pumps more crude than Kuwait), Exxon's decisions can affect the rest of the industry over the long term. "Exxon sets the standard," says Art Smith, who heads up John S. Herold Inc., an independent energy-consulting firm. Smith points out that Exxon's huge stock buybacks--the company has repurchased nearly 10% of its shares since 2000--have been imitated by rivals like BP and Total.

Other critics suggest that Exxon and its brethren are missing an opportunity to use the windfall to develop alternative energy sources. "I haven't seen the scaling up I would have anticipated," says Jennifer Layke of the World Resources Institute, a Washington, D.C., think tank. "Given the risk from climate change and from regulation, diversification is a clear first step to protect their own businesses." That's not likely to happen while Raymond is in charge. He's famously skeptical of global warming, and Exxon's stance has allowed archrival BP to cast itself as the "green" energy company. (Raymond and other Exxon execs declined to be interviewed by FORTUNE.)

So far, Exxon's shares haven't been hurt by Raymond's stance. Exxon is up 20% this year, eclipsing GE as the most valuable U.S. company. And Exxon is expected to hike its dividend by as much as 20% when it announces first-quarter earnings April 28. But the cash is still building at a remarkable rate. Each dollar jump in the price of a barrel of oil adds another half billion in earnings. Based on current prices, Exxon is accumulating more than $1 billion a month--even after allocating for dividends, share repurchases, and capital spending. If oil simply stays where it is now, Exxon's cash could approach $40 billion in 12 months. By then Raymond's expected to have handed off the top job--and the headache of what to do with all that cash--to heir apparent Rex Tillerson. One wild card: Tillerson could be running the No. 1 company on the FORTUNE 500.

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