Is Exxon Mobil headed for a fall?

By BusinessWeek

Like the ever-expanding universe, Exxon Mobil (XOM, news, msgs) seems to know no bounds. Its $45 billion profit in 2008 was the biggest haul ever by a public company. The runner up? Exxon, in 2007. No. 3? Exxon, in 2006.

Plunging oil prices are sure to devour some of those earnings. But even that presents opportunity, for Exxon -- long the unchallenged exemplar of Big Oil -- has an enormous stockpile of cash and shares with which to buy rivals.

Indeed, it's difficult to imagine a scenario in which the company would soon be knocked from its perch. Even in this sharp recession, Exxon shares have held up, falling just 15% last year compared with a 22% decline by its rivals and 38% for the Standard & Poor's 500 Index ($INX).

"If one oil company is left standing, it will be Exxon," says Fadel Gheit, a long-time industry analyst for Oppenheimer (OPY, news, msgs).

Yet despite its seeming invincibility, Exxon is surprisingly vulnerable. Interviews with industry analysts, consultants and current and former employees cast doubt on its strategy and growth prospects.

• Talk back: What do you see ahead for Exxon Mobil?

Most immediately, Exxon's oil reserves and production are shrinking, and it is relying on less valuable natural gas to replenish them. Worse, it is getting much of that gas from a single country -– Qatar -- that could change the terms of their deal at any moment.

More broadly, Exxon seems overly wedded to a playbook drafted decades ago. The company's aversion to risk, a point of pride, has caused it to withdraw from lucrative exploration projects prematurely. And Exxon's perceived arrogance, reflected in its dismissal of alternative energy and its strained relations with foreign governments, has cost it business.

All the Big Oil companies face the conundrum of size, but none more than Exxon. Its very bigness makes it hard to grow -- or even sustain itself. Since the 1999 merger with Mobil, Exxon's total reserve base of oil and natural gas has barely budged, while production has fallen. Buying another oil company would add to its cash flow but wouldn't alter its inability to grow on its own.

Exxon's production numbers represent a failure. In 2001, former CEO Lee F. Raymond vowed to increase daily oil production to 5 million barrels by 2005, from 4.25 million. Instead, output fell. In 2006, with oil prices surging, daily production averaged 4.2 million barrels, and Exxon extended its 5 million goal to 2010. In 2007 it pumped just 4.1 million barrels. As prices soared in 2008 before crashing later in the year, production dropped to 3.9 million.

Exxon's performance raises a question once unimaginable: Has the company effectively reached the limits of its productive capabilities?

Company spokesman Alan Jeffers brushes off such notions. He says Exxon never set specific production targets but rather "estimates of production capacity growth." Those estimates, he says, turned out wrong: "Plans are plans, and actual events may be different."

Continued: A swaggering self assurance

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