Underfunded pensions may bite U.S. energy sector

HOUSTON (Reuters) - Oil majors Exxon Mobil Corp (XOM.N), ConocoPhillips (COP.N) and other energy companies top the list of U.S. companies with severely underfunded pensions -- a situation that may drain precious cash in a time of capital market volatility, especially at smaller firms.

A sell-off in crude oil and natural gas prices has already prompted many energy companies to rein in spending and conserve cash, but the sector may also see earnings pinched by contributions needed to make up for shortfalls in defined pension plans.

And while no significant financial strain is expected right away, analysts said the expected jump in obligations bears watching.

"It certainly could become an issue for some of these guys because the market has been lousy," said Phil Weiss, energy analyst with Argus Research. "And in this lousy market, they still have these pension obligations."

Corporate defined pension plans have been hit hard by the sharp declines in the global stock markets this year. Standard & Poor's estimated corporate retirement coffers in aggregate may end the year with a shortfall of more than $219 billion.

Exxon has the largest pension deficit of companies in the Standard & Poor's 500 with a $6.7 billion shortfall, Conoco is fifth with a shortfall of $1.6 billion and Chevron Corp (CVX.N) comes in at eighth with a pension deficit of $1.2 billion, according to fiscal 2007 data compiled by Citigroup Equity Research.

Struggling companies such as Ford Motor Co. (F.N), Pfizer Inc (PFE.N) and Sears Holdings Corp (SHLD.O) also have some of the lowest funded pension accounts. But it is surprising to see energy companies anywhere on the list given the record earnings and cash flow in recent years, Citigroup analyst Tobias Levkovich said.

"Energy sector pension funds were the worst funded," Levkovich wrote in a recent report. "This could be troublesome for the sector, which already has experienced sharp downward earnings estimate revisions recently, as a result of plummeting oil and gas prices."

The shortfalls could cause additional earnings and cash flow weakness, Levkovich said.

But while Exxon and others have enough cash to increase funding for pension obligations without financial disruption, others like refiner Sunoco (SUN.N) and oil service firm Rowan Companies Inc (RDC.N) warned of higher costs in regulatory filings.

COSTS RISE

Rowan, based in Houston, said its 2009 pension contribution may top $130 million, most of which is payable March 31. In the last five years, the company's annual contributions have averaged $34 million.

"Recent capital markets weakness has adversely affected our pension assets and will likely cause a significant increase in our required funding in 2009," Rowan said in a quarterly filing with the U.S. Securities and Exchange Commission.

Conoco, the third-largest U.S. oil company, cautioned that "decreased returns on pension fund assets may also materially increase our pension funding requirements," a filing showed.

The Pension Protection Act of 2006 requires companies that have underfunded pension plans to pay additional premiums. It also closed loopholes that previously allowed underfunded plans to skip payments.

Under current accounting rules, companies have to put the current market value of their pensions on their balance sheets at the end of the year.

The pension problem is particularly acute in the energy sector because the group is comprised of older companies who are still required to make contributions to a defined plan while newer companies have switched to undefined benefit plans like 401(k)s, analysts said.

Exxon will need to make contributions of up to $1.05 billion to non-U.S. pension funds, an increase of $521 million from the year-end 2007 estimate of $529 million, the company said in its latest quarterly SEC filing.

Exxon, based in Irving, Texas, also said that it does not expect to make a contribution to its U.S. plan in 2008.

But because Exxon's cash pile is huge, a near doubling of pension contributions will not likely hurt the world's largest publicly traded company, analysts and investors said.

"If Exxon's pension is underfunded, so what?" said Fred Burke, president of Johnston Lemon Asset Management, who owns Exxon shares. "They have the cash flow to pay -- they have about $37 billion in cash."

Energy companies that are expected to make "meaningful" cash contributions to their pension plans in 2009 include Halliburton Co (HAL.N), Weatherford International (WFT.N), Transocean Inc (RIG.N) and BJ Services Co BJS.N, but no financial strain is expected at this time, Citigroup told clients.

(Reporting by Anna Driver in Houston, editing by Matthew Lewis)