Why Exxon Provides a Good Analogy for the Central Banker's Dilemma

This article on Exxon stock seemed to be an allegory for the current problem central bankers face:

Earlier this month, Exxon Mobil (NYSE:XOM) reported Q4 2015 earningswhich, as expected, looked ugly considering the large decline in the price of oil over the last one and a half years. Exxon Mobil has long been one of the largest repurchasers of shares, spending a net of $89.74B on share buybacks during the 2010 through 2015 period. However, during the Q4 earnings release, management stated that share buybacks were being halted, presumably to preserve cash...

Contrast that with the strategy from 2008 when share buybacks were accelerated during the market fallout of the Lehman Brothers bankruptcy and the beginnings of what's now known as the Great Recession. Management reduced shares outstanding by 7.5% in 2008 alone...

Oil prices have sunk to lows not seen in more than a decade. The share price hit a low in the $60s in 2015 which hadn't been seen since late 2010. If you're of the belief that oil prices will rebound, eventually, then now should be the time that Exxon Mobil is ramping up the share buybacks not eliminating them.

This is the problem the author is highlighting:  Exxon ran up tens of billions in debt to stimulate the stock price in good times.  Now that times are bad, at least in the oil patch, the tank is empty (so to speak) and they have had to cease buybacks at the very time they would make the most sense (the same amount of money spent at lower stock prices would have higher impact on EPS).  The tank is empty enough that they might have to cut the dividend, an action with such negative consequences for stock value that it would likely undo all the effects of years of stock purchases.

I am not trying to beat up on Exxon -- I actually admire them as a well-managed company and pretty much every large corporation has gotten caught up in this unproductive Fed-inspired game of borrowing at close to zero and buying back stock (to my mind the financial equivalent of the Keynesian digging of holes and filling them back in).  But I hope you can see the analogy with the position of governments and central bankers.   For the last 5 years, when economic times have been good (alright, maybe just OK) governments have been deficit spending like crazy and central banks have been expanding their balance sheets with programs like QE to keep the economy stimulated.  But just as with the situation at Exxon, when the bad times come, bankers are going to find themselves with far fewer options than they had in 2008.

PS:  This is what Exxon really should have been doing the last 5 years -- hoarding their cash and borrowing reserves to be able to buy assets like crazy on the cheap in the next downturn.  They have always been able to do this in past downturns.  I suspect it may not be possible this time.


  1. J_W_W:

    What I find ironic about Exxon and a troubling insight into the mind of Progressives is the New York Attorney General's lawsuit against them. The lawsuit claims Exxon's stance on global warming harmed shareholders, but the lawsuit is expressly designed not to actually benefit shareholders but to also negatively affect Exxon's stock. It is a twisted and evil Progressive move, but then evil and Progressive are redundant.

  2. Noumenon72:

    Rather than presume you know better how to manage the market than a company's management (I guess as a consultant you got used to this), consider that the purpose of buybacks may not be to manage earnings per share at all. They may be a way to compensate management or a way to engage in long-term restructuring without spooking shareholders.

  3. J Calvert:

    At this point, the fed's only "policy mandate" is to keep interest rates low for government borrowers and allow the US government to spend money it doesn't and will never have.

  4. Matthew Slyfield:

    "For the last 5 years, when economic times have been good (alright, maybe
    just OK) governments have been deficit spending like crazy and central
    banks have been expanding their balance sheets with programs like QE to
    keep the economy stimulated."

    If they have to, they can just print more money.


  5. jhp151:

    In this particular case, the harming of shareholders claim is the legal justification to sue the company and not the goal of the lawsuit.

  6. markm:

    Harming shareholders is the entirely predictable effect of the lawsuit. Shareholders will pay for the defense whether the lawsuit succeeds or fails; if it wins, they'll also pay the awards. If harming shareholders is not the goal, those who started the lawsuit are utterly incompetent.

  7. J_W_W:

    Exactly, it's a burn the village to save it sort of move. Hench the NY AG is a total dick.

  8. marque2:

    Stock buybacks are also a way to "give a dividend" to folks without them having to pay taxes on it.

  9. marque2:

    It benefits those who dropped the stock after the period is question. If my stock drops and I sell it and some lawyer comes and sues I might get a bit of my money back and not lose because I am no longer part of the company.

    Oversll, I agree with you, a lawsuit is a lose lose for most shareholders.