Exxonmobil's Edge

ExxonMobil is a little different from other oil companies. It has an unwavering commitment to chemicals in an era when Shell, BP, and other oil majors have divested or put on the block large chunks of their chemical businesses. And at a press conference last month at the New York Stock Exchange, Chairman Lee R. Raymond made it clear that being different is paying off.

At the annual conference, the normally laconic company executives opened up for a morning of glasnost with analysts and the press. This year, the company's executives were in a festive mood. High oil prices and an upturn in the petrochemical business cycle helped give the company a record net income of $25.3 billion for 2004.

In chemicals, ExxonMobil racked up $3.4 billion in earnings, a 70% improvement over 2003 and a company record. Its return on capital employed--23.5%--was its best since 1995, the year of the last petrochemical peak.

One might normally expect modesty at such a forum out of a dark-suit-and-sensible-tie-outfit like ExxonMobil. Instead, company execs behaved more like then-San Francisco 49ers receiver Terrell Owens in 2002 when he pulled a Sharpie out of his sock after a touchdown catch, signed the ball, and handed it to his financial adviser in the stands.

In other words, ExxonMobil execs gloated. Instead of a pigskin, their medium for showing off was PowerPoint slides. One showed how ExxonMobil's petrochemical business outperformed competitors BP, Shell Chemicals, ChevronTexaco, and Dow Chemical in what it considers the "best measure" of a capital-intensive industry: return on capital employed.

"We are capturing far more value than our competition in the improved market conditions," Raymond said at the conference.

Rex W. Tillerson, ExxonMobil's president and Raymond's heir apparent, pointed out that his company has had a five-percentage-point higher return on capital employed than the average return of its chemical competition over the past decade. "It's easy to understand why others are withdrawing while we continue to view chemicals as a source of earnings growth," he said. "Our strategies are yielding results, while our competitors are struggling to simply generate positive earnings."

Perhaps the most important of these strategies is integration. ExxonMobil has massive complexes with large economies of scale in chemicals and refining. Some 90% of ExxonMobil's chemical operations are integrated with other company businesses, Tillerson said. And its refineries are 70% larger than the industry average.

Integrated petrochemical companies always say such things about their businesses. But Robert J. Bauman, vice president for petroleum and chemicals at Nexant Chem Systems, says ExxonMobil's leverage of integration between oil and chemical operations is unique. "ExxonMobil captures the best value through its integration," he says. And it isn't just a matter of deft use of refinery coproducts as chemical feedstocks, Bauman says. The company gains efficiencies from shared energy, infrastructure, and other aspects of its operations.

At the conference, ExxonMobil used integration to take aim at the oil companies that have chemical operations for sale. BP is planning a possible initial public offering of its olefins and derivatives business, newly named Innovene. Shell, which has already divested many chemical operations, is selling its Basell polyolefins joint venture in concert with its partner, BASF. France's Total has separated its nonpetrochemical businesses into its Arkema subsidiary and wants to either sell Arkema or take it public.

Raymond has a cynical take on such approaches. "One of the reasons people are leaving is because they don't have the value from integration," he said.

Moreover, by divesting, Raymond said, these companies are only further dooming the petrochemical businesses. "The announced withdrawal of competitors from the chemical business only adds to our advantage," he claimed. "Once they have separated the refining and chemicals business, they have given away any prospect of capturing the full integration advantage. You cannot capture this benefit across a supply agreement."

The integration advantage is something that ExxonMobil aims to enhance in four planned ethylene crackers.

In China, a proposed cracker will be integrated with a new refinery joint venture. In Qatar, an ethylene complex will be part of a development program for the country's North Field that will eventually include liquefied natural gas and gas-to-liquids plants. In Singapore, the company is planning an ethylene cracker that will complement two refineries and a cracker.

The one place where integration of oil and chemicals may be causing trouble is Venezuela, where ExxonMobil has been studying an ethylene cracker since the late 1990s. Leftist Venezuelan President Hugo Chavez is seeking to irk the U.S. and generate more cash for his government by jacking up the royalties ExxonMobil pays for oil exploration. Raymond, however, said the company isn't losing traction on the chemical project and is spending $1.5 million a month studying it.

The take-home message from the conference: Though politics on the oil side of ExxonMobil can cause headaches for the company's chemical business, don't expect the firm to change an advantageous strategy because of it.