Oil Watchdog
03-07-2008
by dugan
A project of 
3-07-08 by dugan
The next time you pump $70 worth of $3.50 a gallon gasoline into your tank, munch on this thought: When ExxonMobil defends its $41 billion yearly profit profit to us angry peasants, it's a mere "10 percent of revenue," just like other big companies and less than, say, big tech companies. When Exxon reports to big investors, it talks about a much different profit measure.
Exxon's PR department reported this week on CEO Rex Tillerson's speech Wednesday to stock analysts in New York, focusing on plans to "invest more than $125 billion in capital spending over the next five years to deliver major projects to help meet growing world energy demand." More on that later. Buried at the bottom, and not much reported in the financial media, was this:
"ExxonMobil continued its superior performance with a 2007 return on average capital employed of 32 percent, almost 40 percent greater than its closest competitor, and increased its five-year average to 28 percent."
At 32 percent, Exxon is making more than double what U.S industries make on average by the same measure. And about triple what regulated gas and electric utilities make.
Here's a great piece by consumer columnist David Lazarus (now of the LA Times, previously at the San Francisco Chronicle) explaining Big Oil's deceptive spin when it talks about profits to different audiences. It was written in 2006, but it's just as accurate today:
While the oil industry habitually downplays its profitability when speaking to lawmakers, the media or the public, it sings an entirely different tune when addressing investors and others in the financial community.In such cases, industry officials emphasize not their relatively benign profits as a percentage of total revenue but their very impressive "return on capital employed," or ROCE -- their earnings as a factor of money spent to make money.
Exxon's chief exec, Rex Tillerson, reiterated this point to Wall Street analysts in March.
"In our view, ROCE continues to be the best overall measure of financial performance given the long-term and capital-intensive nature of our industry," he said. "I would be cautious of anyone who tries to de-emphasize it."
As for Exxon's plan to invest $125 billion over five years on exploration, refineries and the like, remember that it's a well-spun announcement, not a promise. Not a penny is likely to go to developing renewable fuels. And remember that Exxon spends more than it invests, on a yearly basis, to buy back its own stock.
Since the end of 2005, Exxon has announced $60 billion in stock buybacks, money that doesn't do anything but boost the stock price and act as a piggy bank for a company that makes unspendable, and unspeakable, amounts of profit.
COMMENTS
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Dear Dugan, I should start charging you tuition for these little economic lessons.
Read the definition of ROCE here: http://en.wikipedia.org/wiki/Return_on_capital_employed
The first thing to note is that ROCE is a measure of profitability BEFORE taxes. So that doesn't mean that ExxonMobil makes 32% on every dollar they invest.
Secondly, the asset base for ROCE is the book value of the assets. Or the amount of money invested in capital, less any accumulated depreciation. Two types of businesses will have high ROCEs, service businesses with few physical assets (think Microsoft) and legacy businesses where investments made decades ago have low book values but still generate income. XOM has both types of business.
It is very unlikely that new investments can make the 32% ROCE. So capital investments made today will certainly dilute XOM's ROCE. That is partly why they are buying back their own stock.
Despite the ROCE, ExxonMobil is planning to greatly increase their capital budget.
http://www.chron.com/apps/pluck/login.mpl?url=http%3A//www.chron.com/disp/story.mpl/ap/fn/5595987.html
That is something that oilwatchdog has been calling on ExxonMobil to do, stop buying back stock and invest more in oil and gas production. Having now done so, I am breathlessly waiting for Oilwatchdog to praise XOM.
Or maybe not.
03-07-2008 | USER: Darth Petrol
I just love it when our friend Dugan (and in this case also guest Lazarus) show us how little they know about the things they criticize. Exxon is trying to spin the information? This is just so ludicrous, because everything they've said about their performance is a matter of public record. ROCE records how they've done this year with investments made over past years, and in a rising price environment ROCE will be higher (ROCE will also be higher for a company with increasing debt). But in any given year snapshot, return on sales tells us how they are doing now. Revenues versus costs. It says that costs are going up with revenues, which is a very legitimate and relevant message. Both measures are valid, and both are freely available to the public. How could anyone be fooled, and more to the point how could Exxon believe they are fooling anyone? Even industry dilettantes like Dugan and Lazarus can easily get this information. If Dugan finishes Darth's economics course, she might even find that there are many more ways to measure a business's performance, and each measure can tell us something slightly different about that performance. More to the point though, can Dugan tell us how Exxon is guilty of high oil prices, what the cap on ROCE should be, and how many industries and companies would be effected by this cap?
Here's another indicator: ROI. Despite Oilwatchdog's allegations that the oil industry controls government and global oil prices, the oil industry was a pretty lousy business to be in from the mid 1980's until recently (what... was George Bush Sr. asleep at the wheel? He was an oilman too). I don't recall any Oilwatchdog industry criticism in those years. I do recall similar kinds of rants in the early 1980's though. And the history below proves the rants were wrong.
Dugan is skeptical about Exxon's invesmtent. But look at the record. Between 1992 and 2006, the U.S. oil industry invested more than $1.25 trillion in a range of long-term energy initiatives compared to net income of $900 billion. Not enough for Dugan I guess!
Another favorite Oilwatchdog rant: share buybacks. Considering the data below (I know that's a bad word around here, data), why do you single out the oil industry, exactly?
Finally, Dugan, can you please, please tell us why you want these companies you so despise investing huge amounts in alternative energy? Do you really want them investing so much that they end up running the alternative energy business? Or just some arbitrary number, not that much, butmore than they spend now (and not at universities either)? Who has the right to tell a company what they should invest in? They do have incentives to invest some money into it, but it's not their core expertise, and besides, there is PLENTY of money out there looking for a solution, thank you very much. Probably well over 10% of all US venture capital. Note how the rapid increase in alternative energy investment matches recent oil price increases. Maybe you should be more positive about high oil prices! They will bring alternative energy solutions sooner than would have otherwise been possible, and you can retire!
03-08-2008 | USER: ermchair261