Exxon Mobil this week became the first company worth more than $500 billion since the millennial stock boom burst. The Texas oil producer is now nearly twice as valuable as its nearest rival, Royal Dutch Shell. But the supermajor faces supersized obstacles if it ever hopes to become the world's first $1 trillion company.
Size has traditionally been an advantage for Big Oil. As the world shrinks, the number of choice oil fields has diminished and new finds have become more expensive and complicated to tap. The trouble for Exxon chief Rex Tillerson is that to move the needle on a company bigger than most governments, he needs to broker ever larger deals.
Yet last year Exxon didn't replace its reserves through the drill-bit for the first time, according to Oppenheimer research. That's because more of the world's oil reserves have become off limits to Exxon and other private drillers. Many are controlled by national oil companies, such as Saudi Arabia's Aramco or Mexico's Pemex. Expropriation by governments like Russia and Venezuela took other reserves off the market.
In the past, Exxon's size gave it sufficient political sway to overcome such hurdles. Today, size may be a liability. It makes Exxon a continuing target for the environmental movement. And every time gas closes in on $3 a gallon, legislators talk of imposing windfall taxes. That's not happened. But equally, Exxon has failed to persuade Congress to allow it to drill in Alaska and other environmentally sensitive places.
And where once Washington might have sent the Marines into a country that failed to honor its commercial agreements, all it could do when Hugo Chávez tore up Venezuela's pact with Exxon and others was express disapproval. Mind you, that's probably for the best. But Exxon rivals like Gazprom and PetroChina have effectively used their ambassadors to sign deals with foreign governments.
Moreover, as money has flowed to Russia and China, their domestic exploration companies increasingly have the resources to drill complicated wells in far off places, reducing Exxon's competitive advantage. This may put Exxon in the position of having to spend more, and receive less, from its future projects. This would reduce its industry-leading returns on capital and impede its march to the head of the $1 trillion club.
Refco Redux
New York summers are fairly predictable. Bankers flock to the Hamptons, shell-shocked interns crawl out of the office at midnight, and Refco files to go public.
Two years ago, the commodities broker made its debut, only to quickly go belly-up after being sunk by an accounting scandal that led to the filing of criminal charges against its chief executive. It's now returning with the IPO of MF Global, a division of Man Group that owns some of Refco's old assets. But it's not as bad as it sounds.
While it's been a while since Refco went bankrupt, its legacy won't die. Indeed, this week the examiner of Refco's bankruptcy case said that two accountants and a law firm should be sued for professional negligence in the matter. And MF Global's prospectus contains a little warning: The company can't provide reliable historical financial information for the Refco assets it purchased. Still none of Refco's old problems should come back to haunt MF Global. The broker simply acquired some of Refco's client accounts and other assets. The broker says there are no legal liabilities.
Moreover, investors shouldn't let a little Refco -- and it is a little -- get in the way of looking at MF Global fondly. Refco's assets accounted for 11% of total revenue last year, and only 8% of assets. Yet the midpoint of the price set for MF Global values the company at about $4.5 billion, or 24.5 times last year's earnings. With peers like GFI Group trading slightly higher, Refco reincarnate will fare better this time around.
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