Why did Exxon's earnings fall in 1998?

The primary driver was weaker crude oil prices, which averaged over $6.00 per barrel (33%) lower than 1997 due to reduced Asian demand, mild winter weather, and high OPEC-era production. Lower natural gas prices, weaker chemicals margins, and depressed copper and coal prices also contributed. Downstream refining and marketing results partly offset the decline.

What are the terms of the Mobil merger?

Each Mobil common share would convert into 1.32015 Exxon common shares. Exxon shareholders would own about 70% of the combined company and Mobil shareholders about 30%. The deal is intended to be a tax-free reorganization accounted for as a pooling of interests, and includes $1.5 billion in termination fees under certain circumstances. Exxon also holds an option to buy up to about 14.9% of Mobil's unissued common stock under specified conditions. The combined company would be named Exxon Mobil Corporation.

Is Exxon's dividend secure?

The 1998 dividend rose to $1.64 per common share from $1.625 in 1997, and the company declared a $0.41 quarterly dividend in January 1999. Dividends totaled $4.0 billion, a 63% payout of net income. Operating cash flow of $11.1 billion covered the dividend and share repurchases, though the payout ratio was elevated relative to 1997's 48%, reflecting lower earnings.

What are the main legal and financial risks disclosed?

The largest contingent risk is the Exxon Valdez judgment of $5.058 billion, which Exxon is appealing; the company believes the punitive damages are unwarranted and that the ultimate cost cannot be predicted. Other items include Year 2000 compliance costs of $225 to $250 million, a German-Dutch gas border arbitration, and a U.S. Tax Court appeal regarding Saudi crude pricing. Management does not expect these matters to have a materially adverse effect on operations, financial condition, or liquidity.

How strong is Exxon's balance sheet?

Exxon's balance sheet is conservative. Long-term debt was reduced to $4.53 billion from $7.05 billion, with total debt at $8.78 billion and a debt-to-capital ratio of 16.2%, down from 17.8%. Shareholders' equity was $43.75 billion, and the company held $1.44 billion in cash. Working capital was negative $1.8 billion, with a current ratio of 0.91, which is typical for a company that relies on commercial paper and internally generated funds.

XOM 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 30, 1999. Cited figures are marked; the original filing is the authoritative source.

Exxon Corporation's 1998 Form 10-K shows a sharp earnings decline driven by the collapse in oil prices.

Net income fell 25% to $6.37 billion^a ($2.58 diluted EPS) from a record $8.46 billion in 1997, as average crude prices fell over $6.00 per barrel (about 33%) to their lowest level in more than two decades. Revenue dropped 14% to $117.8 billion. Exploration and production earnings fell 42% to $2.71 billion, while refining and marketing rose to $2.46 billion, its second-highest level ever, offsetting part of the upstream weakness.

Chemicals earnings declined 11% to $1.21 billion^b. The balance sheet remained conservative, with debt-to-capital of 16.2%, long-term debt cut to $4.5 billion from $7.1 billion, and shareholders' equity of $43.75 billion. Cash from operations was $11.1 billion, against dividends of $4.0 billion and share buybacks of $3.1 billion.

The filing's most significant strategic item is the December 1, 1998 agreement to merge with Mobil Corporation. Mobil shareholders would receive 1.32015 Exxon shares per share, leaving Exxon holders with about 70% of the combined company, which would be renamed Exxon Mobil Corporation. The deal is subject to shareholder approval and regulatory review, and carries $1.5 billion^c in termination fees.

Management has discontinued the share repurchase program in connection with the merger. Capital and exploration spending rose to $10 billion^d, and the company reports no oil or gas asset impairments in 1998.

Key risks flagged include the unresolved $5.058 billion Exxon Valdez punitive damages judgment, which is under appeal and for which the ultimate cost cannot be predicted, and Year 2000 compliance costs estimated at $225 to $250 million. Management characterizes these as not materially adverse to operations, financial condition, or liquidity.

02—Key points

Key Highlights

Net income of $6.37 billion ($2.58 per diluted share) was down 25% from the 1997 record of $8.46 billion, reflecting the lowest average crude prices in over twenty years.
Revenue fell 14% to $117.8 billion, with crude and product purchase costs down 22%.
Exploration and production earnings dropped 42% to $2.71 billion, while refining and marketing earnings rose 19% to $2.46 billion, the second-highest level in company history.
Proposed merger with Mobil Corporation (1.32015 Exxon shares per Mobil share; Exxon holders to own about 70% of the combined company) would create Exxon Mobil Corporation, pending shareholder and regulatory approval.
Balance sheet strengthened: long-term debt fell to $4.5 billion from $7.1 billion, debt-to-capital ratio was 16.2%, and shareholders' equity was $43.75 billion.
Dividend increased modestly to $1.64 per share (a 63% payout ratio), but share repurchases were discontinued following the merger announcement after $3.1 billion of buybacks in 1998.
Exxon Valdez punitive damages judgment of $5 billion (total $5.058 billion) remains under appeal, with the ultimate cost not predictable.

03—Questions

Frequently Asked Questions

Why did Exxon's earnings fall in 1998?
The primary driver was weaker crude oil prices, which averaged over $6.00 per barrel (33%) lower than 1997 due to reduced Asian demand, mild winter weather, and high OPEC-era production. Lower natural gas prices, weaker chemicals margins, and depressed copper and coal prices also contributed. Downstream refining and marketing results partly offset the decline.
What are the terms of the Mobil merger?
Each Mobil common share would convert into 1.32015 Exxon common shares. Exxon shareholders would own about 70% of the combined company and Mobil shareholders about 30%. The deal is intended to be a tax-free reorganization accounted for as a pooling of interests, and includes $1.5 billion in termination fees under certain circumstances. Exxon also holds an option to buy up to about 14.9% of Mobil's unissued common stock under specified conditions. The combined company would be named Exxon Mobil Corporation.
Is Exxon's dividend secure?
The 1998 dividend rose to $1.64 per common share from $1.625 in 1997, and the company declared a $0.41 quarterly dividend in January 1999. Dividends totaled $4.0 billion, a 63% payout of net income. Operating cash flow of $11.1 billion covered the dividend and share repurchases, though the payout ratio was elevated relative to 1997's 48%, reflecting lower earnings.
What are the main legal and financial risks disclosed?
The largest contingent risk is the Exxon Valdez judgment of $5.058 billion, which Exxon is appealing; the company believes the punitive damages are unwarranted and that the ultimate cost cannot be predicted. Other items include Year 2000 compliance costs of $225 to $250 million, a German-Dutch gas border arbitration, and a U.S. Tax Court appeal regarding Saudi crude pricing. Management does not expect these matters to have a materially adverse effect on operations, financial condition, or liquidity.
How strong is Exxon's balance sheet?
Exxon's balance sheet is conservative. Long-term debt was reduced to $4.53 billion from $7.05 billion, with total debt at $8.78 billion and a debt-to-capital ratio of 16.2%, down from 17.8%. Shareholders' equity was $43.75 billion, and the company held $1.44 billion in cash. Working capital was negative $1.8 billion, with a current ratio of 0.91, which is typical for a company that relies on commercial paper and internally generated funds.

04—Continue

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