FYI: (a) I’m not a financial analyst or investment adviser (b) I’m not a big fan of oil companies (c) I do own some shares of Chevron Texaco and Slumberger — not enough to sway my thinking (d) $4 per gallon for gas gives me pain at the pump, too
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Critics characterize oil companies’ profits as “obscene”, “unconscionable”, and “windfall”.
In a previous post, I compared Exxon Mobil (the poster boy for big oil) to two other mega-corps — Coke & Microsoft. The data says that Exxon’s profit margins are lower, its effective tax rate is higher, and its ROA (return on assets) is well below Microsoft’s and roughly at par with Coke’s. Draw your own conclusions.
Drilling deeper on Exxon’s financial performance over the past couple of years (see chart below for details) and putting them in the perspective of standard financial ratios leads me to 5 pivotal conclusions.
1) Exxon is a very, very big company with a market cap over $450 Billion … so all of its numbers seem supersized
2) From “50,000 feet” , there’s no evidence of price gouging … gross margins have been flat, before and after rhe run-up in crude oil prices
3) Exxon’s already paying a lot of taxes — over 40% of pretax profits, about $90 Billion since Jan. 2005
4) There’s plenty of reinvestment … capital expenditures about 30% of cash flow
5) Almost 70% of cash flow is going directly (and immediately) to shareholders in the form of dividends and stock repurchases
Some Details
1) Size & growth: Revenues have increased by about 9% from 2005 to 2007 (2% in 2006, 7% in 2007) to a whopping $404.5 billion. Unfortunately, it’s tough to split the increases between volume (more oil sold) and price. Seems reasonable to conclude that a lot of it is price since refinery capacity is relatively fixed.
2) Margins & prices: “Cost of Revenue” has held relatively flat at about 57.5% so, by definition, gross profit margins (the flip side of cost of revenue) have been relatively flat at 42.5%. Translation: Exxon’s “percentage mark-up” over its costs has stayed flat — if price gouging, would expect margins (i.e. mark-up) to increase. Of course, as costs go up, the profit margin expressed in dollars (instead of percentages) goes up. It’s reasonable to infer that Exxon’s profit — in dollars per barrel — is increasing along with crude oil prices, but that’s not evidence of gouging behavior.
3) Taxes: Exxon paid over $90 Billion in taxes from January, 2005 to March, 2008 — an effective tax rate over 40% (46.1% in Q1 of this year)
4) Reinvestment: over the 3 year period, Exxon invested about 30% of its cash flow — almost $50 Billion — in capital expenditures (presumably for drilling rigs, refineries, etc.)
5) Shareholder distributions:in recent years, about 70% of cash flow has been distributed directly to shareholders in dividends ($31.4 Billion in 2007) and stock buybacks (about $85 Billion since Jan. 2005)
So what ?
1) Retail gas prices have gone up proportionately to crude oil prices and gross margins have been flat — where is the evidence of the much touted price gouging?
2) The financial ratios are relatively constant across the years — pre and post the crude oil run up. Where’s the windfall?
3) An effective tax rate over 40% strikes me as pretty high. How much higher does it need to be pushed to be a “fair share”?
4) $50 Billion in capital expenditures — 30% of cash flow — sounds like reinvestment to me. It’s not in alternative energy sources, but as I like to say “there’s a reason they’re called oil companies”
5) In my opinion, oil company execs have been greedy (and stupid) raking off so much compensation. But, keep in mind that most of the company’s cash flow is going directly to shareholders, either in dividends or stock buybacks (which prop up the share price for shareholders who sell) .
Note: Exxon has about 5.3 Billion shares outstanding — about 1/2 in the hands of institutions (think mutual funds) and 1/2 held by individuals. They invested to be owners, and they’re the direct and immediate beneficiaries of Exxon’s financial success. Said differently, any windfall profits tax would come directly out of their pockets into somebody else’s. Think about it — how fair is that?
Click chart to make it bigger
The Homa Files 
