Coyote Blog

This article on Exxon stock seemed to be an allegory for the current problem central bankers face:

Earlier this month, Exxon Mobil (NYSE:XOM) reported Q4 2015 earningswhich, as expected, looked ugly considering the large decline in the price of oil over the last one and a half years. Exxon Mobil has long been one of the largest repurchasers of shares, spending a net of $89.74B on share buybacks during the 2010 through 2015 period. However, during the Q4 earnings release, management stated that share buybacks were being halted, presumably to preserve cash...

Contrast that with the strategy from 2008 when share buybacks were accelerated during the market fallout of the Lehman Brothers bankruptcy and the beginnings of what's now known as the Great Recession. Management reduced shares outstanding by 7.5% in 2008 alone...

Oil prices have sunk to lows not seen in more than a decade. The share price hit a low in the $60s in 2015 which hadn't been seen since late 2010. If you're of the belief that oil prices will rebound, eventually, then now should be the time that Exxon Mobil is ramping up the share buybacks not eliminating them.

This is the problem the author is highlighting:  Exxon ran up tens of billions in debt to stimulate the stock price in good times.  Now that times are bad, at least in the oil patch, the tank is empty (so to speak) and they have had to cease buybacks at the very time they would make the most sense (the same amount of money spent at lower stock prices would have higher impact on EPS).  The tank is empty enough that they might have to cut the dividend, an action with such negative consequences for stock value that it would likely undo all the effects of years of stock purchases.

I am not trying to beat up on Exxon -- I actually admire them as a well-managed company and pretty much every large corporation has gotten caught up in this unproductive Fed-inspired game of borrowing at close to zero and buying back stock (to my mind the financial equivalent of the Keynesian digging of holes and filling them back in).  But I hope you can see the analogy with the position of governments and central bankers.   For the last 5 years, when economic times have been good (alright, maybe just OK) governments have been deficit spending like crazy and central banks have been expanding their balance sheets with programs like QE to keep the economy stimulated.  But just as with the situation at Exxon, when the bad times come, bankers are going to find themselves with far fewer options than they had in 2008.

PS:  This is what Exxon really should have been doing the last 5 years -- hoarding their cash and borrowing reserves to be able to buy assets like crazy on the cheap in the next downturn.  They have always been able to do this in past downturns.  I suspect it may not be possible this time.

Equal protection means that the same law applies to everyone, at least in theory.  But compare these two stories:

1. Exxon fined $600,000 for 85 bird deaths in five states over five years

Exxon Mobil has agreed to pay $600,000 in penalties after approximately 85 migratory birds died of exposure to hydrocarbons at some of its natural gas facilities across the Midwest.

The fine amounts to about $7,000 per dead bird.

The oil company pleaded guilty to causing the deaths of waterfowl, hawks, owls and other protected species, which perished around natural gas well pits or water storage areas in Wyoming, Kansas, Oklahoma, Colorado and Texas over the last five years....

“We are all responsible for protecting our wildlife, even the largest of corporations,” said David M. Gaouette, the United States attorney in Colorado, in a statement accompanying the Justice Department’s announcement.

We are all responsible for protecting our wildlife... except if we are politically-favored solar companies with strong ties to the Obama White House

2. No fines for solar power plant that may be killing 28,000 birds a year

A common sight in the sky above the world's largest solar thermal power plant is a "streamer," a small plume of smoke that occurs without warning. Closer inspection, however, reveals that the source of the smoke is a bird which has inadvertently strayed into the white-hot heat above the plant's many reflecting mirrors. Because the BrightSource Energy plant near Ivanpah uses supercritical steam rather than photovoltaic energy, the sun's heat is reflected off more than 300,000 mirrors to a single point, which is used to drive a steam turbine. The downside of that, of course, is that it's lethal for any wildlife that strays into the picture -- a problem that was recognized well before the facility opened, but now the government has gotten involved.

Government wildlife inspectors believe that insects are drawn to the highly reflective mirrors, which in turn lures local birds to their doom. BrightSource feels that the issue has been overblown, claiming that only 1,000 living creatures will die in a year, but the Center for Biological Diversity believes the actual figure is closer to 28,000. The US Fish and Wildlife service is pushing for more information and an accurate calculation of the deaths before California grants the company any more permits for solar plants.

You can see from the last line that the Feds don't seem to be even considering a penalty, but are just considering whether they should permit such plants in the future.  If the 28,000 figure is correct, this company should be getting $196 million in fines (the Exxon rate of $7000 per bird)  if there was any such thing as equal protection.  Even the company's admitted figure of 1,000 a year is almost 60 times as high as Exxon was penalized for, despite the fact that Exxon experienced the deaths across hundreds of locations in five states and this is just one single solar plant.

The same alternate standard is being applied to the wind energy industry, as I wrote a while back here.

Just in case you believed all the BS around the passage of Dodd-Frank that in the future there would be no such thing as too big to fail, just look at yesterday's JP Morgan hearings in Congress.  

U.S. lawmakers on Wednesday interrogated J.P. Morgan Chase Chief Executive James Dimon in a much-anticipated and sometimes-heated exchange after the bank registered more than $2 billion in derivatives losses

No one grills Exxon-Mobil executives when the company loses a couple of billion to a nationalization somewhere or grills Sears executives as the blunder their way towards bankruptcy.  These are private business losses.  The only reason to grill JP Morgan is if Congress still considers the American taxpayer to be ultimately on the hook for trading losses (above and beyond deposit insurance requirements, which the Bear Sterns and AIG bailouts certainly were).

The arch-corporate-statist  -- and official manufacturing company of the Obama Administration is feeding at the trough again.  Apparently a perfectly profitable company cannot buy assets from another profitable company without a large subsidized loan from taxpayers.  In this case, the Obama Administration is funding the KCS in its purchase of 30 new locomotives from GE.  The Obama Administration has recently doubled-down on its backing of the US Ex-Im bank, which has been helping to fund Boeing aircraft sales to foreign airlines (each of which, surprise!, has a couple of GE engines on it).

GE knows how this political game is played, with resources allocated based on quid pro quo.  Just the other day, GE announced that it would help bail out Obama and Government Motors buy mandating that all its company vehicles be Chevy Volts, in effect committing to buy more Volts than Chevy sold to consumers all last year.  Of course, the circle has no end, so in turn GE will be rewarded with $90,000,000 in government subsidies for its 12,000 Chevy Volts, a number that could increase to $120 million if Obama's proposal to increase the per car subsidy is accepted.

By the way, the Obama Administration has criticized oil companies like Exxon-Mobil for earning excessive profits and getting overly large tax breaks.  In 2010, Exxon paid a whopping 40.7% of its income in taxes ($21.6 billion in taxes on $53 billion in profits).   In the same year, Obama subsidiary General Electric paid 7.4% of profits in taxes.

Strangely enough, it turns out that increased prices seem to induce market participants to seek out and invest in new sources of supply.   Someone should develop a theory around this.

From a good article in today's New York Times: 2009 is turning out to be a bumper year for new oil discoveries; new oil discoveries always occur, but this year has been unusually fruitful. This quote from the article illustrates the important dynamic intertemporal incentives that price signals provide:

These discoveries, spanning five continents, are the result of hefty investments that began earlier in the decade when oil prices rose, and of new technologies that allow explorers to drill at greater depths and break tougher rocks.

"That's the wonderful thing about price signals in a free market "” it puts people in a better position to take more exploration risk," said James T. Hackett, chairman and chief executive of Anadarko Petroleum.

More than 200 discoveries have been reported so far this year in dozens of countries, including northern Iraq's Kurdish region, Australia, Israel, Iran, Brazil, Norway, Ghana and Russia. They have been made by international giants, like Exxon Mobil, but also by industry minnows, like Tullow Oil.

It is an indicator of the power of the state that most CEO's of public companies feel the need to pay lip service to every politically correct trend that comes along and to engage in outright sycophancy every time they meet with politicians.  The reason, unfortunately, is that morons like Maxine Waters have been granted nearly unlimited powers over commerce.  Some CEOs unfortunately go even further, going beyond just humoring politicians to play the game themselves, engaging in outright rent-seeking for themselves and their shareholders.

So it is in this context that it is nice to see the CEO of Exxon-Mobil continuing in that company's traditions of not rolling over to populist political pressure:

Rex Tillerson, chairman and chief executive of Exxon Mobil Corp.,
the world's largest oil-and-gas company, came out swinging Wednesday
against the environmental movement, arguing the science of climate
change is far from settled and that his company views it as its
"corporate social responsibility" to continue to supply the world with
fossil fuels....

Avoiding the political correctness that many oil executives are now
showing on global warming, Mr. Tillerson called for a continuation of
the debate, rather than acceptance that it is occurring, with the
potential consequence that governments will implement policies that put
world economies at risk.

"My view is that this is so extraordinarily important to people the
world over, that to not have a debate on it is irresponsible," he said.
"To suggest that we know everything we need to know about these issues
is irresponsible.

"And I will take all the criticism that comes with it. Anybody that
tells you that they got this figured out is not being truthful. There
are too many complexities around climate science for anybody to fully
understand all of the causes and effects and consequences of what you
may chose to do to attempt to affect that. We have to let scientists to
continue their investigative work, unencumbered by political
influences. This is too important to be cute with it."

Mr. Tillerson said Exxon Mobil, despite its reputation as a staunch
climate change denier, is in fact close to the issue as the only oil
company that is a member of the United Nations Intergovernmental Panel
on Climate Change.

Exxon Mobil came under repeated attack during the rowdy meeting for
not showing leadership to combat global warming, with some arguing it
is putting shareholders' capital at risk by not moving into greener
energy.

Among the many critics who stood up in the city's Morton H. Meyerson
Symphony Centre, where the meeting was held, was Neva Rockefeller
Goodwin, the great-granddaughtger of John D. Rockefeller, who founded
Exxon's predecessor 125 years ago.

But her proposal to have Exxon Mobil prepare a report on the impact
of climate change on emerging countries and to embrace greener energy
was backed by only 10.4% of shareholders.

The Exxon shareholder meeting is a zoo.  LIttle serious work gets done.  There are about a zillion people who buy one share of stock so they can show up and flog whatever political hobby horse they have.  I do wish I had been there, though, so that in response to Ms. Goodwin's proposal I could have in turn asked for a report on how alarmist-proposed 80% reductions in fossil fuel consumption would have impacted poverty and progress in developing countries. 

A while back I had observed that Wal-Mart had passed Exxon as the left's #1 Satan.  It is good to see Exxon back on top. 

Today, Greenpeace attacked ExxonMobil for exercising its free speech rights.  In particular, it criticized Exxon-Mobil for spending $2 million funding about 40 groups it calls "global warming skeptics."  For perspective (missing from this article), pro-anthropomorphic global warming research receives over $2 billion in the US alone (and that is just government money, it does not include private money), making Exxon's funding less than 0.1% of that provided to groups with opposing viewpoints. 

How settled can the science be if the anthropogenic global warming (AGW) believers feel horribly threatened by a group they outspend more than 1000:1?  This is like Hillary Clinton complaining that Mike Gravel is being allowed to spend too much money.  The AGW folks have consistently lost debates where they went head to head against credible skeptics.  If you don't want to argue the issues, you resort to ad hominem attacks.

By the way, shame on Exxon-Mobil for getting all defensive about their spending.  They should have said "sure we are skeptics, and we think there are a lot of good reasons to be skeptics.  In fact, we'd love to have a televised debate with Greenpeace on AGW."

Update: In a related announcement, scientists declared the science of Phlogiston settled.

The feeding frenzy that the media has been salivating over for days can begin, now that Exxon-Mobil (XOM) as announced quarterly profits.  They reported net income of $8.4 billion on $88.98 billion in sales, for a net income margin of 9.4%.  Previously I observed that 9.4% for a peak profit in a cyclical industry is pretty average, and that over the last decade oil company profits have been below average for the whole of US industry.

In fact, most investors found these profits to be disappointing.  You know you have a fun CEO job when half the country is pounding on you for profits being too high and the other half are pounding on you for profits being too low.  The fact is that XOM and other large US oil companies don't get the benefit of rising oil prices that they did, say, 40 years ago.  US oil companies no longer own most of their overseas reserves since many of their foreign operations were nationalized by countries in the 1960s  (with the US government refusing to lift a finger to protect these US assets, one of the early instances of the no-blood-for-Exxon argument).  Today, XOM must pay near market rate for much of this crude, either in arms-length purchases or through royalty agreements stacked in the favor of local governments.

So what can you folks who are screaming about high gas prices and obscene oil company profits do?  Well, you could tax all these "windfall" profits away, like Ford and Carter did in the late 1970s.  Of course, you would still be paying $3 for gas, but the profits would go to the US Congress to spend, who I am sure will do an excellent job.  Probably could pay for another bridge in Alaska.  Or, you could somehow ban oil companies from making a profit, and drop gas prices by that 9.4%, or about 28 cents.  This would get you $2.72 gas instead of $3.00 gas.  Feel better?  Of course, in either scenario, oil companies would stop making any investments in refining or oil exploration.  Supplies would quickly begin to fall (I won't go into it now, but take my word for it that refineries and oil wells require constant reinvestment just to keep running at current capacity) and I would bet it would take less than a year for that 28 cents to be right back in gas prices due to shrinking supply.

OK, what else could we do?  Well, we could cap gas prices.  Which is a fabulous idea, as long as no one who drives a car has anything better to do than sit in lines all day.  Or, we could regulate oil like we do telephones and electric utilities.  Highly regulated electric utilities make a net income margin of 7.1%.  If we regulated oil companies down to 7.1%, then this would reduce gas prices from $3.00 to $2.93.  So a huge and inflexible and costly national regulatory structure would save about 7 cents a gallon.  Oh, and since for most of 10 years oil company profits have been less than 7.1%, then, a utility type regulatory environment would likely raise gas prices and profits in most years. And of course you would get all the business flexibility, creativity, and customer service currently demonstrated by your local electric and phone company.

So what government action should a irate gasoline customer demand?  Well, I know this answer goes against years of education that the role of government is to step in and take over when any little aspect of life is not quite what citizens want it to be, but the correct answer is "none".  Its like the line from Wargames:  "A strange game. The only winning move is not to play."

More on why gas prices are still well below their historic peaks here.

In a remarkable example of an anti-business hit-piece called "Fueling Contempt" on the front page of the AZ Republic, the Republic leads with this line:

Reaction to major oil producers' staggering profits ranges from rage at
the pumps to calls for profits to be reinvested in exploration,
alternative-energy research or simply returned somehow to the public.

The article is mainly focused on the profit announcement at Exxon-Mobil, so I will use their numbers to put "staggering" into context.  E-M announced profits of $9.9 billion on sales of $101 billion.  For those who cannot divide, that is a profit margin of 9.9% of sales.  Since when is a profit margin at a cyclical peak of 9.9% considered "staggering"?  Microsoft makes 30%, in good times and bad, with a fraction of the investment or risk X-M takes.  From this chart, you can see the average for all industry is about 8%, with the oil industry generally below this number in all but cyclical peak quarters and banks, pharma, software, semiconductors, financials, household products and many others all consistently over 10%.  Procter and Gamble makes a margin of nearly 13% of sales selling toothpaste and detergent but we are going to begrudge oil companies 7.6% on average and 10% in their best quarters?

The article does absolutely nothing to put the profits in their proper context, though I was able to do it in one paragraph.  This is the only context the article offers:

The oil companies assert that their profits are no larger than other
businesses and that they just look big because it is a big business.

Exxon Chairman Lee R. Raymond said in a statement that the company
"acted responsibly" in its pricing and said its fourth-quarter profits
would come nowhere close to the $9.9 billion in the third quarter.

That doesn't necessarily wash with Adrienne Valdez of Phoenix.

"I can't afford to buy socks because I am paying twice what I used to
for gas," she said. "It's not right that they should be making billions
at our expense."

In Phoenix, gas prices soared to $3.14 after Hurricane Katrina hit the
Gulf Coast. The average Valley price per gallon, which has been falling
in recent weeks, was $2.72 Thursday, according to AAA Arizona.

Bruce Trushinsky, owner of the former Moon Valley Exxon station at 1901
W. Thunderbird Road in Phoenix, called Exxon Mobil's $9.9 billion
quarterly profit "disgusting."

He became so upset at the $7.6 billion profit posted by the company in
the second quarter that he canceled a longtime branding agreement.

"I ripped down all the Exxon signs and threw them in the garbage,"

he said. Now, after 30 years, Moon Valley Exxon is Carmel Automotive
and Fuel. Trushinsky said the high wholesale prices charged by Exxon
were devastating to his business and that the last straw was when the
company canceled its dealer-incentive program.

"They cut us off, then they announced their (second-quarter) profit increased $2 billion."

This is populist crap, and is the reason the MSM cannot be taken
seriously when they say that they are neutral reporters.  They are not
reporting, they are cheerleading an anti-oil company bigotry that has
existed for decades.  I think that the E-M management should be embarrassed to make such a small return in their best quarter.  Shareholders should take management to the woodshed for investing and risking so much in a cyclical business and making so little.  For gods sakes, they make a lower margin than Jif peanut butter earns.  Is anyone suggesting that we impose a windfall profits tax on Charmin?

I find the title of the article "Fueling Contempt" interesting - I am not sure if it was meant to refer to high oil company profits or if it was just a statement of intent for the article.

UPDATE:

Since 1977, governments collected more than $1.34 trillion, after adjusting for
inflation, in gasoline tax revenues"”more than twice the amount of domestic
profits earned by major U.S. oil companies during the same period

This is just gasoline taxes - it does not include income tax payments, property tax payments, and oil lease royalty payments.