Exxon’s Unusual Suspects

July 29, 2011

By Christopher Swann
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The pressure is mounting for Exxon Mobil boss Rex Tillerson. Disappointing second-quarter results on Thursday represented a rare miss of Wall Street expectations for the oil titan. The primary culprit was refining, where earnings can be capricious. But at a time when Exxon is still struggling to win over investors on its beefy bet on natural gas, Mr. Tillerson can ill afford such slips.

American natural gas is the usual suspect these days when shareholders look for weakness at Exxon Mobil. Ever since the biggest American company by market capitalization splurged $31 billion on gas giant XTO last year, low prices have been a drag. This time the blame lay elsewhere. Along with refining and marketing, European gas, until this latest quarter a major money-spinner, proved a letdown. Many of the problems appear to be due to unexpected maintenance costs and other one-off factors.

That won’t necessarily let Mr. Tillerson off the hook. Since the XTO deal was announced in December 2009, Exxon shares have badly trailed rivals, rising just 25 percent, against an 80 percent climb for those of ConocoPhillips, 70 percent for Chevron’s and 50 percent for Royal Dutch Shell’s. Such punishment looks overly harsh.

While American natural gas prices are down about 15 percent since the deal, XTO has certainly been no bust. Since the acquisition, Exxon has bolstered XTO’s natural gas resources by about a third to 60 trillion cubic feet. The exodus of skilled shale drillers and executives from XTO that many feared has failed to materialize. Production has been rising. In addition, far from being cowed by the broader reaction to the big transaction, Mr. Tillerson has bolted on several smaller American gas firms.

It is to Exxon’s credit that it refuses to be a slave to quarterly expectations. And Mr. Tillerson’s long-term bet that gas will overtake coal as the world’s second most widely used fuel by 2030 still looks credible. But that won’t stop investors from getting restive if Exxon’s earnings misses become more common.

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