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Big Oil: We Told You So


Tue, Nov 18, 2008 at 11:07 am

    Big Oil: We Told You So

    Big Oil: We Told You So

    By Steve Hargreaves, CNNMONEY.COM

    November 18, 2008

    NEW YORK, NY — It would be tempting to say they told us so.

    Back when oil prices were going nowhere but up, public officials,
    consumer rights groups and newspaper editorials chastised the major oil
    companies for not investing enough in new production. Big Oil, they
    argued, was simply lavishing shareholders with massive stock buybacks
    and dividends at the expense of the motoring public.

    "The results illustrate an industry with plenty of resources to produce
    more oil in the U.S., but slow to spend the money to develop them,"
    Judy Dugan, research director at Consumer Watchdog, wrote in a
    statement last August, just after Chevron posted a quarterly profit of
    $6 billion.

    "In a normal market, with prices for a product rising like they have
    for oil, manufacturers in competitive markets would be spending like
    crazy to make more of it," Dugan continued. "Yet oil companies are able
    to sit back and make more money by selling less."

    The oil companies, in turn, argued that commodity prices are cyclical
    and would fall soon enough. In addition to a lack of access to
    resources and skyrocketing production costs, the companies said
    planning projects that can take a decade to build and cost billions of
    dollars meant they needed to take a long-term view. In short, they just
    didn’t believe the high prices were here to stay.

    With oil prices now barely a third of that they were just 4 months ago, it seems they were right.

    "They have been very good stewards of their investors’ money," said
    Rayola Dougher, senior economic adviser for the American Petroleum
    Institute. "The majors are well positioned to move forward with
    investments over the next year."

    Dougher was careful to stress it’s the major oil companies that are in good shape.

    Many of the independents embarked on aggressive exploration and
    production programs over the last few years, at a steep price. Rates to
    charter drill rigs have risen to more than $800,000 a day from as much
    as $400,000 a few years back. Leases that once went for $200 an acre
    have been known to fetch upwards of $20,000.

    The market has punished these companies. Shares of Anadarko (APC,
    Fortune 500) are down over 30% over the last three months. Occidental
    (OXY, Fortune 500) is off 35% and Hess (HES, Fortune 500), a darling of
    2007, has sunk 40%.

    Other smaller oil producers are in even worse shape.

    "Some of the smaller independents are having a hard time and are delaying or canceling projects" said Dougher.

    The major oil companies were much more cautious during the price runup,
    and returned much more to their investors in the form of dividends and
    share buybacks.

    For the five big international oil companies – ExxonMobil (XOM, Fortune
    500), Royal Dutch Shell (RDSA) BP (BP), Chevron (CVX, Fortune 500), and
    ConocoPhillips (COP, Fortune 500) – spending on share buybacks
    increased sixfold, to nearly $60 billion a year in 2006 from under $10
    billion a year in 2003, according to a study done this summer by Amy
    Myers Jaffe, a fellow in energy studies at the James A. Baker III
    Institute for Public Policy.

    Spending on developing existing oil fields, however, rose at a less
    torrid pace – to $50 billion from about $35 billion, while spending on
    finding new oil fields increased to $10 billion from about $6 billion.

    But lumping all the major oil companies isn’t fair.

    Paul Sanky, an oil company analyst at Deutsche Bank, said the major oil
    companies behaved very differently over the last few years.

    He said ConocoPhillips and BP made several acquisitions at the height
    of the market. ExxonMobil, on the other hand, generally held back.

    With prices now falling, Exxon now "looks like a hero on the way down," said Sankey.

    Investors have taken note. BP shares are down 25% over the last three
    months, while ConocoPhillips is off 40%. Exxon, meanwhile, has lost
    just under 5%.

    "Exxon got criticized for underinvesting over the last four years,"
    said Fadel Gheit, a senior energy analyst at Oppenheimer. "It’s not
    that they were stupid, it’s just that they thought it was too
    expensive. Now Exxon is going to laugh all the way to the bank."

    Gheit said oil companies made investment decisions with a target price in mind of about $30 a barrel back in 2005 or 2006.

    Over that last year or so, he believes the target price has risen to
    about $40 or $45, although he still thinks Exxon has set the lowest

    Exxon may laugh all the way to the bank during this downturn, but when
    the world pulls out of this economic slump, will the proper investments
    have been made to make sure prices don’t run up like they did earlier
    this year?

    Dugan, from Consumer Watchdog, doesn’t think so.

    There’s a sense that they think the prices are now too low to invest," she said "They are whipsawing it both ways."