Rex Tillerson's Exxon: Always prepared

The CEO is a company vet who's steeped in oil but sees natural gas playing a major role in the future.

By InvestorPlace Mar 14, 2012 9:42AM

By Susan J. Aluise

 

ExxonMobil (XOM) CEO Rex Tillerson is probably the most prototypical oil man since J.R. Ewing ruled the rigs in the 1980s TV series "Dallas." But unlike the scheming, double-dealing J.R., the plain-spoken (and often stubborn) Tillerson credits the Boy Scouts for making him the leader he is today.

 

Although mention of Tillerson's Boy Scout roots likely would elicit a loud guffaw from Big Oil's myriad enemies, it's clear that his career track has been shaped by that organization's motto: "Be Prepared."

 

Preparation seems to be coded into the former Eagle Scout's DNA. A born Texan who earned a BS in civil engineering from the University of Texas-Austin, Tillerson's first job out of school was as a production engineer at Exxon in 1975. He's been at the company ever since.

 

Upper management started to take notice of Tillerson during the oil boom of the early 1990s when he was heading the highly lucrative exploration and production -- E&P or "upstream" -- operations in the Texas-Oklahoma Belt. From there, he gained international experience in Yemen and in 1998, became president of Exxon Neftegas, which conducts E&P in Russia.

 

After Exxon and Mobil merged in 1999, the mercurial Lee Raymond became chairman of the combined company. Almost at once, Raymond began to groom Tillerson as his eventual heir. Tillerson became president of ExxonMobil in 2004 and was elevated to chairman and CEO in January 2006. Since then, XOM stock has soared 73%, compared with a 22% gain in the Dow over that same time frame.

 

Less than 30 months into his reign, however, Tillerson was targeted with a "no confidence" vote from shareholders -- despite the company's eye-popping performance. ExxonMobil's earnings topped $40 billion in 2007, and XOM stock rose nearly 70% between Jan.1, 2006, and May 28, 2008 -- the date of Tillerson's second shareholder's meeting as chairman and CEO.

 

Despite the company's financial performance, the descendants of oil tycoon John D. Rockefeller believed passionately that the company was on the wrong track and needed to focus more on green energy and solving problems with the environment. That put Tillerson, who believes the switch from oil to renewable energy is a century away, into the Rockefeller family's crosshairs.

 

The family proposed a management shakeup that would strip Tillerson of his job as chairman and appoint an outsider to keep him on a short leash. Tillerson obviously prevailed among shareholders and kept both jobs. And the win helped him pursue the nearly $35 billion purchase of natural gas producer XTO Energy in 2011 -- a deal that likely will define Tillerson's tenure at the helm of ExxonMobil.

 

The XTO acquisition -- and the emergence of hydraulic fracturing (fracking) technology -- has positioned ExxonMobil to take advantage of abundant natural gas supplies that once were too expensive to reach. Although a natural gas supply glut has depressed prices now, Tillerson believes this approach will pay off big for shareholders in the long run.

 

Fueling North America's economy

 

With a forecast of strong growth in global energy demand, the company has budgeted an unprecedented $150 billion over the next five years to find new, unconventional sources of supply, as InvestorPlace's Aaron Levitt wrote about in Exxon's massive spending plan looks right on the money.


"The new sources of oil and natural gas our industry is developing here -- and the way in which we are developing them -- will shape their development on a global scale," Tillerson told attendees of the CERA Week conference in Houston last week. "When combined with the development of Canadian oil sands and Mexico's resources, U.S. unconventional oil and natural gas are fueling the North American economic engine, and revealing the value of sound policy in energy progress."

 

Tillerson has been a vocal critic of the Obama administration's opposition to some key projects -- most recently the Keystone XL pipeline that would have moved crude from the Canadian oil sands to the Gulf Coast. "The unfortunate decision to halt progress on the pipeline was a product of political calculations in Washington -- negating the work of hundreds of hours of public hearings," he said. "In the end, it was also a disservice to the public employees who carried out their responsibilities as regulators in this process."

 

While Tillerson is a strong advocate of using fracking technology to tap unconventional energy fields, he recognizes that it's controversial in many circles -- particularly in natural resource-rich Europe. His solution: a disclosure program about fracturing.

 

Bottom Line: At the end of the day, Rex Tillerson is an oilman with a second major in natural gas. He's not the guy who will paint ExxonMobil green and reinvent the energy giant as a big alternative energy player. This focus affects shareholders two ways: in returns and socially conscious investing.

 

With a market cap of $407 billion, XOM is trading in the $86 range, only 2% below its 52-week high last May. It has a current dividend yield of about 2.2%. Tillerson's company will face headwinds in the short run due to the current overcapacity in natural gas. Expect more opposition to the fracking technology by U.S. policymakers and citizen groups as well.

 

Nevertheless, XOM's fortunes will rise along with the growing demand for energy. So this is a good long-term play, even though I'd prefer to buy it at $82.

 

Many socially conscious investors, though, have a big problem with Tillerson's fossil-fuels-first philosophy. Groups like Green America believe the company's "apparent success is based on a dangerous disregard for the planet and its people."

 

Of course, other oil companies like Chevron (CVX), ConocoPhillips (COP) and Royal Dutch Shell (RDS.A) aren't well loved either. Even though Tillerson is far more diplomatic than predecessor Lee Raymond, don't expect him to make many friends in the environmental movement any time soon.

 

As of this writing, Susan J. Aluise did not hold a position in any stocks mentioned here.

 

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