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GasbagsHow dumb does Big Oil think you are?

By Daniel Gross
Posted Friday, April 28, 2006, at 6:03 PM ET

Ordinarily, earnings announcements are an occasion for shameless executive preening. Exceeding analysts' estimates, by even the slimmest margin, is cause for chest-thumping, back-patting, and high-fiving. Good results are touted as evidence of the management team's brilliant strategy, flawless execution, and unwavering commitment. Any negatives, if not ignored entirely, are generally chalked up to things beyond human control.

But not this week in the oil industry. On successive days, the three largest U.S. oil companies, ConocoPhillips (Wednesday), ExxonMobil (Thursday), and Chevron (Friday), have reported huge, blowout quarters. Among them, the trio earned a stunning $15 billion in the first quarter alone. But rather than blare the news, the firms have tried to soft-pedal their record earnings. After all, the timing is less than optimal. Congressmen in Washington are stumbling over themselves trying to do something—anything, by gosh!—about higher gas prices: calling for windfall profit taxes, proclaiming war on price-gouging, and foolishly proposing a $100 tax rebate to help with gas payments. (In other words, taxpayers would borrow money from foreigners like the Saudis in order to send $100 checks to Americans so they can buy more gas from foreigners like the Saudis.)

So, it's no surprise there's been a concerted—and so far, unsuccessful—effort to downplay the scope, scale, and size of Big Oil's profits. Here's how they've done it:

This business sucks. In an effort to get ahead of the curve, Big Oil has been putting out the message that oil is actually a bad business to be in. The American Petroleum Institute has been running full-page advertisements in the New York Times this week that show where a hypothetical dollar spent on gas at the pump goes: 19 cents for taxes; 26 cents for refining, distribution, and service stations; and 55 cents for the crude oil. The ads also cite a PricewaterhouseCoopers study that shows the industry in 2005 "earned 8.5 cents on every dollar of sales." These figures are intended to elicit sympathy for the poor gas companies, struggling to get by with their 8.5 percent margins. Don't fall for it. Integrated companies like ExxonMobil—which pump crude, refine it, and sell it—capture 81 cents of every dollar spent on gas. And 8.5 percent is a pretty good margin for a capital-intensive, high-volume business like oil. ExxonMobil's profits last quarter were $8.4 billion on sales of $89 billion—about 9.4 percent of sales.

Profits? What profits? Remember the episode of Happy Days when Fonzie, try as he might, couldn't quite say the word "wrong." Today's Chevron conference call was a little like that. Steve Crowe, vice president and chief financial officer, kicked off the conference call by talking about the company's "results." As in: "The company reported results of $4 billion, or $1.80 per diluted share. Our results were up nearly 50 percent compared with the first quarter of 2005 mainly due to higher commodity prices … ." Steve, the word you're looking for is "profits."

Well, we may have good profits results. But it's not our fault! As API head Red Cavaney wrote to Congress this week: "Oil companies do not set the price of crude oil." In this recent corporate op-ed, ExxonMobil, the nation's largest company, portrays itself as a mere waif, tossed about by macroeconomic winds: "Our earnings go up and down with the business cycle." Of course, if oil CEOs like recently retired ExxonMobil boss Lee Raymond are just a bunch of huckleberries with the dumb luck to be in the right place at the right time, you wonder why they deserve nearly $70 million in annual compensation and a $98 million pension.

We're doing everything possible not to report big results! In their earnings reports and conference calls, each of the Big Three emphasized actions taken by the company to reduce net income. ExxonMobil noted that it distributed $7 billion to shareholders in the first quarter through stock buybacks and dividends, up 67 percent from the year before. In its earnings report, ConocoPhillips took great pains to show that while it earned $3.29 billion in the quarter, it spent much more than that on capital expenditures and other items. "During the quarter, the company reinvested 141 percent of its net income into the development of oil and gas resources and its global refining business."

It's not us, it's you! Sure, fat-cat CEOs own plenty of stock and receive options. But in our ownership society, gigantic mega-cap stocks like these are essentially community property. ExxonMobil notes that among those reaping the benefits of the record profits are the "more than 2.5 million people who directly own shares, and the millions more who do through their pension, insurance, and mutual funds."

We feel your pain. This most un-Clintonian of industries has resorted to a Clintonian tactic. Jad Mouawad of the New York Times reported that Ken Cohen, vice president for public affairs at Exxon, held a conference call with reporters this week. "Obviously it was a good quarter for us," Cohen said. "We understand that people are quite upset with the price they're paying at the pump, and we empathize with that." As another oil man once put it: "Message: I care." It didn't work for him, either.

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Daniel Gross is the Moneybox columnist for Slate and the business columnist for Newsweek. You can e-mail him at . He is the author of Pop! Why Bubbles Are Great for the Economy.
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Remarks from the Fray:

It's really heartening to read about all those stock buybacks and dividends, especially if you're a shareholder looking for growth, because they mean that Exxon Mobil has concluded it's better to give the money back to shareholders now than invest in making the company stronger in the future.

Put differently, Exxon Mobil's $7 billion in buybacks and dividends represents 83% of its profits last quarter, none of which is now available for investment by the company in research and development or even exploration. And I'll bet that most of the remaining $1.4 billion was used to reduce debt or increase shareholder equity directly. In fact, a big chunk of it probably will go into the next phase of the buyback program, $6 billion more that was announced at the earnings press conference.

In light of world and market events, you'd think that Exxon Mobil would want to spend most of its profits on finding ways to make the company grow in the future, or at least to find ways to limit the traditional oil industry boom-bust cycle by expanding its investment in alternative energy technologies (or, heck, the Mobil travel guides). That Exxon Mobil decided that the best way to use 5/6 of its profits was to hand them over to shareholders does not suggest a lot of faith in the company's future.

Of course, this isn't new. Last year, when profits rose 40%, Exxon Mobil increased its R&D budget by less than 10%, with total R&D of less than 2% of its Exxon Mobil's expenses. For a company in a business that is characterized by increasing scarcity of its main product, this demonstrates a remarkable lack of faith in its own ability to find better ways to get its raw product or to find alternative ways to produce energy to sell to its customers. If I were a shareholder, I think I'd be asking why.

--randy-khan

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