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Exxon Mobil Corporation (XOM) and Its Shareholders Are Learning a Tough Lesson

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I hate to break it to you, but growth generated though share buybacks won’t last forever. That’s the tough lesson that Exxon Mobil Corporation (NYSE:XOM) investors are learning these days. Shrinking production is now forcing the company to shave its quarterly buyback program as the recent drop in oil prices is causing earnings growth to slow.

Exxon Mobil Corporation (NYSE:XOM)

In its recently reported first-quarter earnings, Exxon produced earnings of $9.5 billion. That’s a whole lot of money; however, it represents earnings growth of just $50 million from the same quarter last year. That’s anemic growth of 1%, yet, because Exxon is an expert at repurchasing shares, its earnings growth appears much higher. The company’s $5 billion of share repurchases in the quarter helped increase earnings per share by 6% over last year.

The big sore spot in the quarter came from oil-equivalent production, which slipped 3.5%, though excluding certain impacts, the production decrease was just 1.2%. This came despite the company’s spending $11.8 billion on capital and exploration projects. That’s up 33% from last year, though it does include the company’s $3.1 billion acquisition of Celtic Exploration, which, if backed out, meant the company spent only $8.7 billion on exploration against $8.8 billion in the year-ago quarter.

Exxon Mobil Corporation (NYSE:XOM) has been struggling to grow its production in a meaningful way for a few years now. However, on a per-share basis, the company’s production growth has been industry leading, thanks to its steady buybacks. Over the past five years, each share has an interest in 21% more production, which is an annualized growth rate per share of 5%. As the following chart shows, Exxon Mobil Corporation (NYSE:XOM) easily outpaces Chevron Corporation (NYSE:CVX), Royal Dutch Shell plc (ADR) (NYSE:RDS.A) and BP plc (ADR) (NYSE:BP) :

Source: ExxonMobil investor presentation.

The only problem is that production growth per outstanding share can’t be maintained through buybacks forever. Lack of real production and earnings growth has the company reducing second-quarter buybacks by $1 billion from the most recent level of $5 billion. Shareholders might not remember the last time a pullback like this happened, as the company has been buying back an average of $5 billion a quarter since the end of the financial crisis.

That being said, the ExxonMobil empire is far from crumbling. Instead, the case can be made that Exxon Mobil Corporation (NYSE:XOM) is a far superior investment because of how superbly it allocates its capital. Not only does the company outpace its peers when it comes to production growth per share, but it also beats these same peers which it comes to its return on capital employed:

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