Follow your money
August 2nd, 2008Record Big oil profits from record oil prices and taxpayer subsidies — where does all your money go?
I know what you are thinking: Surely, Big Oil will take those staggeringly immense and almost immoral profits from the suspiciously fast rise in oil prices [you just love adverbs, don't you!] — along with the $33 billion in taxpayer-funded subsidies you’re going to give those politically powerful and remarkably greedy companies over the next five years (see here) — and invest in both new drilling and new energy technology. No it won’t, no it won’t, and stop calling me Shirley.
In fact, the AP reports:
Hmm, 55% of $120 billion is a staggering $66 billion used to pump up their own stock price.
But some critics say Big Oil focuses too much on boosting stock prices, in an industry that sometimes ties executive pay to stock price.
“Some critics”? “Sometimes ties executive pay to stock price”? Don’t forget that the industry always gives mega-stock options to executives.
What about R&D?
This figure was in a recent Financial Times article. Let’s forget Schlumberger, “the world’s largest oil services company” that obviously has a motivation to develop new oil exploration technology. And the semi-public Petrobras, which is “is the world’s leader in development of advanced technology from deep-water and ultra-deep water oil production.”
All those other embarrassingly profitable oil companies, invest 0.4% of sales (or less!) on R&D. The implications are painfully obvious:
And in focusing on buybacks and dividends over exploring for new oil, some critics say, oil companies jeopardize its already dwindling share of world supply.
“If you’re not spending your money finding and developing new oil, then there’s no new oil,” said Amy Myers Jaffe, an energy expert at Rice University who’s studied spending patterns of the major oil companies.
Ending the moratorium on coastal drilling isn’t going to reduce your pain at the pump one penny through 2030 (see The cruel offshore-drilling hoax). That’s pretty obvious since Congress’s 2006 opening of the Gulf of Mexico to drilling, which has more than twice as much oil as the Outer Continental shelf, was followed by a doubling of oil prices in two years.
With 2% of the world’s oil reserves and 25% of consumption, the main effect of more domestic oil drilling is to enrich the oil companies.
But just because drilling is pointless from an economic point of view, doesn’t mean it’s pointless from a political point of view — a subject I will address tomorrow.
August 2nd, 2008 at 11:55 am
The complete Exxon Mobil 2nd qtr story is here
August 2nd, 2008 at 3:15 pm
I learned a few things when I ran computer simulations of Prudhoe Bay back in the early ’70s: Humble Oil and Refining Co (Exxon) considers itself a “good corporate citizens”, maximizes current dollars (discounted cash flows), keeps shareholders happy, avoids economically marginal investments, and is only interested in economically exploitable (highly profitable) reserves.
So, like any pyramid scheme (aka Ponzi) they can be expected to get out while the profits are good and the stock price is still high — and to leave the dregs to the scavengers. Expect ExxonMobil and the others to get out while the getting is good. Investors expect nothing less than maximum returns (aka dividends and sell price)! It is good business … being a “good corporate citizen.”
It would be interesting to see who is selling shares while the corporation is buying back stock … perhaps the major investors … and who might they be … corporate officers, current and retired … this wreaks of Enron … look out Exxon geologists, geophysicists, engineers, accountants, clerks, secretaries and other small fry employees who have all your eggs in one portfolio … basket. “Reallocate” your 401(k) like the big boys are undoubtedly doing.
August 2nd, 2008 at 4:05 pm
It’s not just our money we need to follow; in many cases, it’s also our oil. Just who owns the land (and seabed) these companies want to drill on? We do! The prices they pay for “leases” are nothing compared to their profits. With oil being pumped out on OUR land at $120+ per barrel, all those excess profits by right out to be the public’s, for the purpose of getting our country off oil and on renewables. Obama needs to start making this argument NOW.
August 2nd, 2008 at 4:12 pm
UncaDoug writes:
… look out Exxon geologists, geophysicists, engineers, accountants, clerks, secretaries and other small fry employees who have all your eggs in one portfolio … basket. “Reallocate” your 401(k) like the big boys are undoubtedly doing.
Here’s another thing Exxon isn’t doing with the profits, looking after their employees.
Shortfall At Exxon: All those profits -but underfunded pensions
http://www.businessweek.com/ magazine/ content/ 06_22/ b3986066.htm?campaign_id=search
August 2nd, 2008 at 4:26 pm
Jay - You might find this interesting: WE - Demands for the Candidates
http://www.wecansolveit.org/ page/ group/ DemandsfortheCandidates
1 - If you haven’t already, join wecansolveit.org
http://wecansolveit.org/page/s/signupmain
2 - then join “Demands for the Candidates” group
http://www.wecansolveit.org/ page/ group/ DemandsfortheCandidates
3 - then edit your profile with nickname and city
http://www.wecansolveit.org/page/dashboard/view/private
The website is not easily navigable, so stick to the steps …
August 2nd, 2008 at 4:30 pm
Dennis -
The reply above was meant for you too. Sorry for the omission ;-D
August 2nd, 2008 at 5:51 pm
This earlier reply somehow got waylaid… Check out: WE - Demands for the Candidates http://www.wecansolveit.org/ page/ group/ DemandsfortheCandidates
If you haven’t already, join wecansolveit.org
http://wecansolveit.org/page/s/signupmain
then join “Demands for the Candidates” group
http://www.wecansolveit.org/ page/ group/ DemandsfortheCandidates
then edit your profile with nickname and city
http://www.wecansolveit.org/page/dashboard/view/private
August 2nd, 2008 at 6:00 pm
The figures are not accurate - referring to ExxonMobil, because I am familiar with their replacement of reserves - ExxonMobil has been able to virtually maintain oil reserves on an even keel - in other words they are finding new oil reserves in the approximate amount of reserves that they are drawing down each year thru production.
If it were otherwise, it would have a serious negative impact on the price of their stock, as, in essence, the company would be slowly dissolving as a going concern.
Ideally, it would be beneficial to the stockholders and the public to develop new reserves in excess of the drawdown - the only difficulty with meeting that Utopia - it’s extremely difficult to find new reserves, especially with the limitations that are placed on drilling.
Here’s the Democrat’s answer:
http://www.washingtonpost.com/ wp-dyn/ content/ article/ 2008/ 07/ 31/ AR2008073102824.html
August 2nd, 2008 at 6:14 pm
My question is this: Does the profit graph reflect profits including inflation, or profits excluding inflation? This is a very important question, as the Dollar has lost a very significant part of its value since 2001.
The one tool I use to interpret the inflation adjusted price of gasoline is based on two things. One thing is the fact that in 1964 the average U.S. price of gasoline was $0.30 per gallon. In 1964 the three dimes needed to buy one gallon of gasoline were SILVER dimes. The second thing is referring to http://www.coinflation.com to compare the current prices to an inflation adjusted price based upon the current value of those three silver dimes.
Just now I referred to coinflation.com and found that the current melt value of those three silver dimes is: $3.80 per gallon!
In my immediate locale today gasoline is $3.87 per gallon.
August 2nd, 2008 at 6:57 pm
An interesting aside. Exxon Mobil While earned $11.68 BN in profits after paying $32.36 BN in taxes.
If we raise their total tax obligation by one third, that $32.36BN would fall to zero pretty quickly.
August 2nd, 2008 at 7:09 pm
Why aren’t “the People” complaining..Here in Oklahoma they just keep re electing Senator James Inhofe..Why??
August 2nd, 2008 at 7:09 pm
> ExxonMobil has been able to virtually maintain oil reserves on an even keel - in other words they are finding new oil reserves in the approximate amount of reserves that they are drawing down each year thru production.
> it’s extremely difficult to find new reserves
These two statements don’t seem to be compatible with each other.
Are you suggesting that Peak Oil is not real and almost upon us?
August 2nd, 2008 at 7:32 pm
If people are so upset about how much money these companies are making, and how much dividends or stock buybacks they’re doing, why don’t you invest? Seriously, a public companies purpose in life is to maximize value to shareholders. When they have good profits, they can do a few things to accomplish this. Dividends, share buybacks, or re-investing the money where they think the returns would be better.
As far as their profits being “excessive”, their margins are about average I think for public companies. There are many companies out there with much higher profit margins. Should they give up their profits too?
August 3rd, 2008 at 10:16 am
Here is one of the areas where I agree with Joe - the major integrated oil companies are loving the “energy crisis” and lying to the world about their efforts to solve it. Though the rest of this comment will focus on ExxonMobil, the rest of the integrated majors - the companies formerly known as the seven sisters - are making similar decisions.
During the past five years, ExxonMobil has spent more than $120 BILLION in stock repurchasing programs and retired nearly 25% of the company’s outstanding stock. That is a trend line that indicates that the company managers have decided to exit the energy business, not one that indicates that they are being good stewards for their stockholders or their other stakeholders - like the rank and file employees.
During a period when ExxonMobil’s revenues increased from an already enormous $237 billion in 2003 to a nearly incredible $390 BILLION in 2007, the company’s total employment dropped from 88,000 to 80,000 and its annual production rate in barrels of oil equivalent dropped by about 10%.
(I use the adjectives of “enormous” and “incredible” sparingly. However, I work in a very large organization - the US Navy - that has a total employment of close to a million people - 12 times as many as ExxonMobil. Like ExxonMobil, we have a lot of capital equipment, lots of retirees, and a huge, global enterprise. Our annual budget is less than half of ExxonMobil’s annual revenue.)
ExxonMobil is careful with its R&D efforts - the annual investment in that area has gone up by just 30% in the period from 2003 - 2007 ($618 Million to $814 million). As a percentage of revenue the investment is close to zero - 0.26% in 2003 and 0.20% in 2007 - and dropping.
It is also spending a decreasing portion of its revenues on exploration and development - 6.5% in 2003 versus 5.3% in 2007.
Now I can understand that the company managers may have figured out that there really is a peak in oil production that is either here, past or very close. It would be logical for the board to decide that there really are no good prospects for new developments and that they should be rewarding their stockholders while the profits are good. However, their annual return to stockholders is relatively modest at about 30% per year over the past five years.
Its dividend - that part of its return to long time stockholders that do not want to sell out, the widows, retirees and orphans - is parsimonious at just $1.60 per share per year even though the earnings per share for the company is almost five times that amount. Stock buybacks remove capital from the company and reward only those stockholders who are selling their stock.
One more thing to think about - if the company really did want to lead, why would it be spending $1 billion per year - about 20% more than the R&D budget - on marketing efforts to convince us all to keep buying Exxon products? If they are having trouble increasing production wouldn’t it be better to add that money to the funds available to return to stockholders as it slowly exits the energy industry?
August 3rd, 2008 at 12:53 pm
Rod, your explanation is very precise and clear. Thanks! But your final sentence is a bit ambiguous and ironic to me … intentionally ironic?
If they are having trouble increasing production wouldn’t it be better to add that money to the funds available to return to stockholders as it slowly exits the energy industry?
… slowly exits the energy industry … slowly selling off assets and buying back stock to support the share price so the CEOs, Corporate Officers, Board Members and Technical Management have time to divest, diversify and “reallocate” their portfolios before the share price collapses when Wall Street sees the forest for the trees and — too late — join a selling frenzy. I foresee a fiery, precipitous end.
You hit the nail on the head with:
Stock buybacks remove capital from the company and reward only those stockholders who are selling their stock.
And those would be whom? CEOs, Corporate Officers, Board Members and Technical Management … in my “humble” opinion. [pardon the pun]
Dennis has issued the call to action:
… all those excess profits by rights [ought] to be the public’s, for the purpose of getting our country off oil and on renewables. Obama needs to start making this argument NOW.
That’s why we need to make phone calls to Obama’s campaign office … and to be persistent until his staff gets it and Obama addresses the issue … and to be fair, call let everyone reading this blog call McCain’s office to give him another opportunity to show — or not show as the case may be — his true colors.
Let Obama know how you feel : (866) 675-2008
Let McCain know how you feel : (703) 418-2008
August 3rd, 2008 at 2:06 pm
UncaDoug,
CEOs, Corporate Officers, Board Members and Technical Management folks who sell their company stock are required by law to disclose such sales. It is a matter of public record. Show some evidence to support your suspicions.
August 3rd, 2008 at 6:08 pm
By mistake I put my comment about the topic of this thread on the next later (up) thread.
In case anybody cares, that is.
August 3rd, 2008 at 6:45 pm
David B. Benson,
I care even though I don’t agree. You wrote: The rule-of-thumb is that when a stock company can’t find any better use for its earnings than buying back its own stock, that company is out of ideas and will ’soon’ be out-of-business.
The real rule-of-thumb is that when a stock company needs capital, it issues stock. When it has enough capital, it buys back stock. Buyback programs are often a sign of a company’s strength.
August 3rd, 2008 at 6:58 pm
Interesting aside: Mercedes is suing Chevron for pulling funding from Cobasys, which has a contract with Mercedes to provide NiMH batteries for the upcoming Mercedes ML 450 hybrid:
http://www.autobloggreen.com/ 2008/ 08/ 03/ chevron-drains-battery-planned-for-mercedes-ml-450-hybrid-merce/
August 4th, 2008 at 6:42 pm
Paul K — There are two thumbs, left and right. Both are opposable.
August 4th, 2008 at 7:11 pm
“Will the real [thumb] please stand up.”
-John Charles Daly (1914 - 1991)
August 6th, 2008 at 4:54 pm
Paul,
One thumb boldly stood up … not to be opposed.
Insider Transactions - Exxon Mobil Corp. (XOM)
http://finance.yahoo.com/q/it?s=XOM
Net Institutional Purchases - Prior Qtr to Latest Qtr
Net Shares Purchased (Sold) (87,689,200)
% Change in Institutional Shares Held (3.4%)
At a sale price of over $90 per share, that nets over $8 Billion ($8,000,000,000) for only 14 “big boys” (1) in just 3 months!
(1) “BIG BOYS”:
CEJKA A TIMOTHY
CRAMER HAROLD R
DOLAN MICHAEL JAMES
GLASS SHERMAN J JR
HUMPHREYS DONALD D
KELLY ALAN J
KRUGER RICHARD MICHAEL
LASALA STEPHEN R
MATTHEWS CHARLES W
MULVA PATRICK T
PRYOR STEPHEN D
SIMON J STEPHEN
SWIGER ANDREW P
WHITACRE EDWARD E JR
“Learn something from everyone you meet”
-Dove Promises
August 6th, 2008 at 9:34 pm
UncaDoug - glad you caught the - definitely intentional - irony. Thank you for providing some additional details for the picture I am beginning to understand through careful reading of the numbers and words in the stockholder reports.
There seems to be little doubt that the corporate managers are taking care of themselves first. If I was a long time stakeholder in XOM, I would be doing my reading and wondering - out loud - why the company top levels are making such selfish decisions.
Notice - no where in the above did I use the word “leader” since no true leader would set up a situation that impoverishes the hard working contributors in order to enrich selected individuals who do not contribute as much to the company success.
If I was a major oil company executive, I would be ready to be kicked out of the country club since the recent (last 10 years or so) market actions have also put many wealthy and influential businesses at risk of failure.
August 28th, 2008 at 7:10 pm
Please stop demonizing Exxon. I’m getting real tired of it. If you don’t like them then don’t use their products and tell everyone you know to stop using their products. This might be very hard to do but at least then you wouldn’t be a 2 faced hypocrite when you bad mouth them. I’m completely serious about this. Anybody who badmouths oil company’s and still uses oil is a hypocrite. This fact cannot be denied.
We floated to victory on a sea of oil in WWII. Oil is completely or partially responsible for every convenience of life. I will repeat. DON”T BE A HYPOCRITE.
At such a point when you completely stop using oil then it will be OK for you start bad mouthing them. Until that time please be quiet.
January 17th, 2009 at 12:17 pm
UncaDoug - glad you caught the - definitely intentional - irony. Thank you for providing some additional details for the picture I am beginning to understand through careful reading of the numbers and words in the stockholder reports.
January 25th, 2009 at 1:59 pm
Please stop demonizing Exxon. I’m getting real tired of it. If you don’t like them then don’t use their products and tell everyone you know to stop using their products. This might be very hard to do but at least then you wouldn’t be a 2 faced hypocrite when you bad mouth them. I’m completely serious about this. Anybody who badmouths oil company’s and still uses oil is a hypocrite. This fact cannot be denied.