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WHEN: Today, Thursday, March 5th
WHERE: CNBC's "Squawk Box"
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with ExxonMobil Chairman & CEO Rex Tillerson and CNBC's Becky Quick on "Squawk Box"(M-F, 6AM-9AM ET) today, Thursday, March 5th. Following are links to the video from the interview on CNBC.com: http://video.cnbc.com/gallery/?video=3000359422 and http://video.cnbc.com/gallery/?video=3000359368.
All references must be sourced to CNBC.
BECKY QUICK: Rex, first of all, I just want to say thank you very much for joining us today. I know it's been a very long day. But we really appreciate your time.
REX TILLERSON: It's my pleasure, Becky.
BECKY QUICK: You've made a lot of news recently. Part of that is cutting capex, I think by about 12%, so it's going to be about $34 billion on average over the next few years.
REX TILLERSON: That's correct.
BECKY QUICK: You've also talked about how you will see an increase in production, maybe about 2% over the next several years. And I just wonder, when you're cutting capex, how does that work out for higher production?
REX TILLERSON: Well, the capex that we expect this year, of $34 billion, which as you point out is down about $4.5 billion from last year, is comprised of a combination of a number of things. First, we expect to capture meaningful cost savings out of this market, as the crude price is corrected, a lot of our costs have corrected with it in the market, particularly here in North America where we're drilling a lot of the tide oil wells and unconventional wells. So we expect our people will carry out some level of activity with fewer dollars required. That along with efficiencies that they've been capturing throughout the last couple of years lead us to believe that we'll see little impact actually on our buyers here in North America. And the rest of the capital expenditures, which are really funding exploration programs and significant development projects, which span multiple years, and involve billions of dollars, those decisions were taken two or three years ago. They were tested against a very broad range of pricing, such that we're confident with those investments, and obviously we're going to proceed and take those to conclusion. And those will be providing – for the future as well. So a lot of the volumes performance last year to this to the next, has by and large, been kind of committed over the last couple of years. And so the part of the program that we would adjust and can adjust is really reactive to these prices. But its cost structure is also very reactive to these prices.
BECKY QUICK: You know, I know that capital expenditures is a long-term game. This is something where you are talking about years down the road, too. Is it fair for an investor to question whether cuts that you make in capex now though, would catch up in terms of production if we're talking three, four, five years down the road?
REX TILLERSON: Well, I think it'd be dangerous for people to try to take that simplistic a view of it. I think what was more important is that people need to look at what are the nature of the investments that we continue to make in terms of not just this year, but the next few years. And we will certainly talk about any significant changes to our investment philosophy, our investment program. I think one of the messages today to the analyst community was that there's no change for us. I mean, we live in a commodity world. And we've been through cycles before. And what has always driven our investment decision-making is unchanged by whether the price is $40 or the price is $100. It's all about the quality of the investment opportunity, which we then test, recognizing that we have huge uncertainties in these decisions we make. We're not smart enough to know what it'll be. So our question is how robust is this investment, what can it withstand, and what can our people do in response to a change in the environment to preserve the value in that investment. So all the investments we're taking have those characteristics.
BECKY QUICK: Yeah, the last time we talked to you, I think it was December. And you said at that point that ExxonMobil was fine. If oil fell to $40 a barrel, you'd be just fine dealing with that. The story we have been talking about this week is that Cushing, Oklahoma the supply there or the storage areas there have really filled up. That could mean that producers are forced to sell more on the open market. There have been some people predicting that could really put pressure on prices. What happens if prices fall below $40?
REX TILLERSON: Well, the immediate effect for everyone will be an impact on their cash flow. Just because you produce the same volumes, you are getting less money for it. I do think though that people should be prepared for some more volatility in this market. Because I made a comment to someone about the storage volumes when they were building a couple of months ago. And I said, "Yeah, and you know, what goes into storage must come out of storage." And so I think there is the potential for there to be farther pressure on the market for a period of time. And I think people kind of need to settle in for what is likely to be a bit of a volatile time. And I think they need to settle in for what may be volatile around this level we're at.
BECKY QUICK: If you have to look out and try and figure out what really is going to impact prices, do you think it is this additional production that we've seen in the United States and Canada? Do you think it is Saudi Arabia and whether – the decision they decide whether to cut production or not, do you think it's the demand picture? What to you is the biggest determinate?
REX TILLERSON: Well, it is a combination of all of those. And what set this off, and when we last talked back in December, I think I made the observation then that it was really fundamental supply and demand. It was getting itself out of balance, and the market's realization that that was happening. I think the market broadly, and when I say market, I'm talking about all of the market and all of the market participants, of which we are one, is this North American phenomenon has occurred over the last three or four years, have been surprised at how robust and resilient this has been, and year after year, there's another million plus barrels a day coming out of North America. And it just keeps coming regardless of whether there's a real demand or not. Now, you combine that with what has been a fairly modest demand for the last couple of years, due to global economic performance, and the two collided. And that's what set this off. So in terms of what happens to changes next, given where we are now, well, clearly the North America producers and developers have taken actions to reduce the number of rigs they're running, cut back on expenditures. But that will have a long tail on it. So it's going to be some time before the effect of that is evident to the market. What is really needed is we need a pickup in market demand. And if you look at the performance of the U.S. economy, it's okay, but it's not robust. Europe is still struggling with declining demand, and China has actually slowed its rate of energy demand growth. So all of those are conspiring to create this imbalance, which is why I've indicated to people, I think people need to be prepared to live with this for a while.
BECKY QUICK: Yeah, I know it's really hard to put your finger on it, or to kind of predict where prices are going. I know you have said volatile, I know you've said we could live with lower prices. Wall Street is all over the map when you start asking them where they think it's going to be.
REX TILLERSON: Yes.
BECKY QUICK: But if ExxonMobil, I mean, I'd say you have a better shot at a prediction than just about anybody else. So it's just – your gut Rex, you've been doing this a long time.
REX TILLERSON: Well, I never pick a number. I mean, you know me, and first because I would be incorrect, and second because I don't want to attract any attention from some regulator that thinks I'm trying to influence the price. I think what I would just say is, you know, where we're operating today in this $40 to $50 kind of environment, there remains scope for things to go below that for a period of time, largely with these inventory numbers that you have already highlighted. Their scopes were to go higher to the extent that there are disruptions of supply elsewhere in the world.
BECKY QUICK: Sure.
REX TILLERSON: Now there's also scope for a lot of pressure down because of those disruptions. If things calm down in Libya, if things calm down in Iraq, if a deal gets done with Iran. There is a lot of developed capacity that's not in the market today that will quickly want to come to the market. So when I look at those fundamentals again, everything lines up, in my view at least for the near term, near term being the next couple of years, and we're going to kind of wallow around where we are with a little bit this way, a little bit that way, until some of this sorts itself out. Now, the last component of that that I cannot predict is OPEC's posture in all of this and how long they maintain their current tactic of maintaining their market share.
BECKY QUICK: You know, you mentioned some of the volatile places in the world where oil is a huge commodity, it's something that is there. You operate in a lot of places that are pretty turbulent places—
REX TILLERSON: Yes, we do.
BECKY QUICK: I noticed that in the next few years, some of the production that you're going to be expanding on includes places like Nigeria, Angola, Far East Russia. And I just wonder how you factor in risk in any of these places when you're making business decisions.
REX TILLERSON: Well, there are multiple elements of risk, obviously. But I think the one you're on is really the geopolitical risk. And the risk that governments remain stable, that the operating environment remains secure and the risk that governments honor the deal and don't try to change the deal. And, you know, the three places you've mentioned, Nigeria, Angola, Russia, we've been there for a long time, in all those countries, decades. And you build that confidence in the early years. And you build that confidence with your performance. And as long as we're delivering on our commitments to those governments, our experiences have been those governments have always delivered on their commitments to us. While they are struggling with their own set of issues, from an operating standpoint, we just have to be mindful of the security of our people, can we keep the operation going by being able to move people in and out and the equipment we need, and otherwise, we just continue to operate and be helpful to the government where we can.
BECKY QUICK: Even if you have a trusting relationship with the government and the area where you are doing business. Let's take a look at Russia. Trade sanctions there, whether or not the Russian government is going to go along and keep its promises with you. Trade sanctions there, according to your own SEC filings could cost you as much as a billion dollars this year. What do you with that?
REX TILLERSON: Well, we made that disclosure, and let me clarify in Russia, because we have really several operations underway there, the largest of which is our Sakhalin operation in the far east of Russia. Sakhalin is unaffected by the U.S. or European sanctions. So our operations there continue to go normally. And including making initial investments into Sakhalin, the areas that are affected by the sanctions were the strategic cooperation agreement areas that we entered into with Rosneft over the last two or three years. And those are exploration ventures in the Arctic Sea, the Black Sea, and to evaluate some of their onshore, West Siberian tide oil. So when the sanctions were invoked, we were in the middle of a drilling operation in the Kara Sea and the Arctic. And we petitioned the U.S. government for safety reasons, protection of people, protection of the environment, to allow us to conclude those operations in an orderly and normal fashion. And they did allow us, they granted us a license to let us complete that. And we're very appreciative of that. So we were able to complete those activities, withdraw all our people, withdraw the equipment. And we're now at essentially just a standstill on those activities. So the billion dollars that we disclosed, is we felt we owed it to the investors to let them know how much had we spent under that JV which is now subject to the sanctions. So there's been no write-offs taken, because we're just at a standstill. We're hopeful that eventually this gets resolved, and we can return to normal activities with our partners in Russia. The sanctions have had essentially no impact on our relationship with our Russian partner, or the Russian government. They understand this is not about us. This is an issue of differences between countries.
BECKY QUICK: There have been a lot of investors that have been shaken by the volatility in the oil markets, as you mentioned. Earlier this week, we spoke with Warren Buffett. And obviously, you know that Berkshire Hathaway sold down a $4 billion position in ExxonMobil. Warren Buffett said he thinks it is a great company, thinks it is very well run, but just that he thinks that he can find better places to play the money. What do you tell investors who are nervous about these volatile oil prices?
REX TILLERSON: Well, we, and you know, we have always considered ourselves to be for the long-term investor. People who buy our stock, they own it for generations, a lot of our shareholders are generational owners. It's been handed down. And that the stock is largely held for people who are looking to send their kids to college. We pay a lot of pension fund dividends to people. So I think in terms of people who own the stock for that reason, if that's why you own it, there's no reason you're going to change.
BECKY QUICK: Yeah, I noticed the yield is 5.4% when you count in the buybacks and the dividend.
REX TILLERSON: That's it.
REX TILLERSON: And I think we're viewed as stable, and we can withstand a lot of things going the wrong direction in our space that our competitors operate in as well. So I think it's really a question of if you want to own this part of the market in your portfolio, we believe we're the best thing to own, particularly in an environment like this. So I think – I appreciated Warren's comments, that he thinks we are a great company and I know Warren has expressed that, you know, to me personally as well. And, which I appreciated. And I understand he has a portfolio he has to manage. But I think we believe we're still a very attractive opportunity for people who want to have a piece of this part of the global economy, which will always be there in the global economy, because there's never going to not be energy demand. And we think we're an attractive stock to own.
BECKY QUICK: You know, ExxonMobil is the largest market-cap company for forever and ever. You watch Apple actually just soar and take off. Do you ever think about that, about how big they are? The biggest market cap? What –
REX TILLERSON: No, I never thought about it when we were the biggest, quite frankly. People, other people, like to make a lot out of that. It's certainly, not any objective, I think it's nice recognition that the market values you in that way. But I think it's not surprising to me that a product like an Apple would come along and race pass something that – we're a commodity business. We do have some differentiated products in the downstreaming chemicals, but that we're going to be one of these steady hold, safe, you can sleep well at night, you can count on the dividend stocks. And so we're kind of steady Eddy is the way I see it.
BECKY QUICK: You know, Rex, there have really been a lot of pressure on the prices, stock prices, for oil, natural gas companies, all of these. And I just wonder if you're looking around, thinking I'm going to cut capex, and I'm going to look to see when these prices come down and really get aggressive with M&A activity.
REX TILLERSON: Well, those two are not mutually exclusive in terms of our capital investment programs and being able to take advantage of the environment if acquisitions present themselves. You know, because the strength of the balance sheet itself, we have a very large holding of treasury shares, as you know. We've been buying the shares back for years. So we have a lot of capacity to get something done without having to in some way change our ongoing capital investment programs. And that's really the way we approach it. If an opportunity presents itself, it's going to largely leave our base capital programs unaffected.
BECKY QUICK: You're looking potentially at places in the United States , I know you have been not interested in adding more Canadian stuff to the portfolio. Is there anything in the U.S. that strikes your fancy?
REX TILLERSON: Well, there are always a lot of things that could be interesting. And you know, these conditions are putting some companies in a position where they want to do something different. Now some are under a lot of stress and distress because of debt they've taken on, some have built their companies to a point where they feel they've gotten all the value they can, time to make a change. For us, as we evaluate them, it's always about value and is this an opportunity that we see the ability to add some value to it, by acquiring. We're not portfolio investors, so to simply buy a company that's developed a resource fully and now it's just producing out is not anything of interest to us. We really are looking for opportunities where a company has great assets, we see an opportunity because of what we can do with those to create value from that. And the transactional exchange works in the current environment. So we're pretty patient. We're not – we don't feel compelled to have to do anything. We already hold the industry's largest resource base of anyone in the world, 92 billion barrels. But we are always looking, you know, how do we make that even stronger and better. And so something comes to the door, we'll have a conversation.
BECKY QUICK: Well, Rex, I want to thank you for your time today. I really appreciate it.
REX TILLERSON: My pleasure, Becky. Thank you.
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