Tough Times for the Exxon Tiger

By Charles Alexander

As profits plummet, the biggest oil company cuts back

Exxon Corp. announced last week that its second-quarter profits totaled $885 million. At almost any other company, such a performance would be cause for frenzied backslapping and fat bonuses. But at the world's largest industrial corporation, which earned $1.8 billion during the same period last year, there were no celebrations. In fact, the plunge in profits has forcecd Exxon to conserve cash by slashing its work force, cutting back on advertising and reducing executive perks. Hurt by sluggish demand for petroleum products and a string of troublesome investments, Exxon is preparing for a bout of hard times.

The retrenchment marks a substantial reversal for a company that politicians and the public have regularly reviled for making "obscene" profits. Between 1978 and 1980, Exxon more than doubled its annual earnings, to $5.7 billion. This incredible surge, caused by an unprecedented jump in oil prices, could not continue for long. Profits dipped slightly in 1981, and oil industry analysts predict that the company's income will fall this year to as low as $4 billion. Though that sum still looks enormous, it will not be enough to meet Exxon's burgeoning cash needs. The company had hoped to boost its budget for exploration and other capital investment this year by 22%, but is now scaling back those plans.

To shore up profits, Exxon is slimming down its work force, which has swelled 28% since 1972, to 180,000. Within the past few weeks, some 30,000 employees in the U.S. have received letters from management offering them cash incentives to quit their jobs. The company will not reveal the exact terms of the golden handshake deals, but range from a few months' pay for relatively new workers to full pension benefits and generous bonuses for those nearing retirement. Insiders say that management's goal is to trim the staff by 15%. Supervisors have warned their workers that unless enough of them resign, layoffs may follow. Says one junior executive fearful of losing her job: "We assume they won't get enough people to go voluntarily."

Exxon's top officers are making some symbolic sacrifices. Managers who had been traveling first class on overseas flights now settle for business class. The pastries and soft drinks that used to be served during all-morning meetings of the investment advisory committee have been dropped (estimated annual saving: $5,000).

Exxon is cutting its corporate advertising budget, insiders say. Already gone is the campaign featuring the theme "We're Exxon. We're more than 100,000 people working on energy." The company is still keeping up its product ads that encourage drivers to fill up with Exxon.

To some degree, Exxon's profit problems are shared by the entire oil industry. The recession has dampened demand for crude and brought an end, at least temporarily, to sharp increases in petroleum prices. As a result, other major oil companies, including Mobil and Phillips, are streamlining their operations to cut costs.

Exxon's cash squeeze has been intensified by management miscalculations in a series of unsuccessful attempts to diversify. Examples: Exxon spent $857 million during the past five years to develop uranium, copper, lead, zinc and molybdenum mines from Nevada to Papua New Guinea. But the company has lost $383 million on these operations because of the slowdown in nuclear reactor construction and a fall in metal prices. After investing nearly $1 billion in a project in Colorado to develop synthetic fuel from shale, Exxon abruptly suspended the program last spring. Exxon Senior Vice President Jack Bennett says the company still thinks that "some of these ventures may yet pay out handsomely in the future."

Attempts to move from raw materials into high technology have been troubled too. In the early 1970s, Exxon entered the market for electronic office equipment with innovative products like the Vydec word processor. After a good start, sales wilted under competition from IBM, Wang Laboratories and other office product specialists. In the past three years, Exxon's office division lost $150 million.

In 1979, Exxon unveiled a new electronic device called the "alternating-current synthesizer" that the company claimed could save energy by making electric motors more efficient. To help in developing and marketing the product, Exxon bought Reliance Electric Corp. of Cleveland for $1.2 billion, which was roughly twice as much as many industry analysts thought the firm was worth. Exxon has since discovered that its synthesizer is too expensive to be practical, and Reliance last year earned a mere $31 million for its new parent.

Exxon's stumbling in nonoil fields may stem in part from the inbred nature of its management. Many of the top executives, including Chairman Clifton Garvin Jr., 60, are engineers who have spent their entire careers at Exxon. Wall Street analysts have begun to wonder if these lifetime oilmen have the versatility to venture out of the petroleum industry.

Sensitive to such criticism, Garvin is now pursuing a back-to-basics strategy. Said he at May's annual meeting: "We are emphasizing established business lines of demonstrated profitability." Despite ambitious efforts to find new oil, however, Exxon's results have been mixed. Since 1978 its oil reserves have dwindled 13%, to 7 bil lion bbl. In the meantime, costly drilling in the Baltimore Canyon and in the Destin Dome region of the Gulf of Mexico has turned up a discouraging number of dry holes. Wall Street stock analysts think that other oil companies may have greater growth potential, and the price of Exxon stock has plummeted 40%, to $27 per share, since November 1980.

These multiplying miseries have darkened what Exxon had hoped would be a bright centennial year. It was in 1882 that John D. Rockefeller formed the Standard Oil Co. of New Jersey, Exxon's corporate ancestor. Since then, Rockefeller's creation has grown bigger and richer than the founder could ever have imagined. Exxon's leaders will need skill and lots of luck to match their corporation's first-century achievements in its second 100 years. --By Charles Alexander. Reported by Frederick Ungeheuer/New York

With reporting by Frederick Ungeheuer

This file is automatically generated by a robot program, so viewer discretion is required.