US giants Conoco and Exxon have more money these days than they know what to do with, so they're handing it out to shareholders. What they aren't doing with it is much that will reduce the oil crunch
While many Americans struggle to fill their gas tanks, big U.S. oil companies are making so much money that they literally don't know what to do with it.
Instead of reinvesting more of their newfound wealth to increase supplies or develop emerging technologies that might one day reduce energy costs, they are giving much of the loot to shareholders already enjoying outsized gains.
In a capital-intensive business, giving cash back to shareholders is often the equivalent of throwing in the towel. It's saying "we can't do anything with this money to improve our business."
And it certainly doesn't address the oil crunch that consumers pay for every day at the pump.
Is that what oil giants pay executives exorbitant salaries to do? Especially in a sector where better long-term vision and reserve development 10 years ago might have helped avoid the current mess?
I don't think so. But that's what's happening.
Big money is worried, too
This isn't just an issue for disgruntled consumers. Analysts debated the issue with ConocoPhillips (COP, news, msgs) execs on its last conference call.
The company made $11.9 billion in net income last year, and it will do even better this year. It plans to give it all back to shareholders, paying more than $3 billion in dividends and spending $10 billion to buy back shares. (Buybacks reduce the number of shares on the market, usually increasing the share price.)
That's a lot of cash, enough to take 9 cents off the price of every one of the 141 billion gallons of gasoline consumed in the United States in a year.
Michael LaMotte of JPMorgan Chase (JPM, news, msgs) questioned why ConocoPhillips wasn't devoting more than $15 billion to its capital budget. After all, ConocoPhillips production volumes declined in the last quarter, even without counting production lost when it got booted out of Venezuela.
Citing the juicy returns that energy companies get from finding and producing oil with crude prices are so high, LaMotte expressed exasperation. "I mean, clearly excess cash goes to buyback, but if I look at returns of a buyback program versus (capital spending), what's the thought process there?" he asked.
Conoco chief James Mulva, who places a big emphasis on cutting costs as a way to raise his company's stock, brushed off the protest. "We like the discipline of the share repurchase," he said. "If we find that we have more cash flow, it's not really going to be going toward capital spending."
For example, take a look at ExxonMobil (XOM, news, msgs), the biggest publicly traded U.S. oil company. It generated $40.6 billion in net income last year and $36.6 billion in free cash flow. What did it do with those riches?
It gave $38.4 billion back to shareholders -- $7.4 billion in dividend payments and $31 billion through share buybacks.
Let's put that $38.4 billion in perspective. Assume the average household spent $2,200 on gasoline last year, up 10% from the $2,000 the Bureau of Labor Statistics (BLS) says they spent in 2005, the latest numbers available.
This means the windfall profits that ExxonMobil gave back to shareholders last year were enough to buy all the households in both California and Pennsylvania gasoline for the entire year.
It was enough to give everyone a 27 cents-a-gallon discount on gas nationwide for the whole year.
Despite ExxonMobil's generosity with shareholders, it's made so much money recently that it still had $31.4 billion in cash, net of debt, at the end of the first quarter of 2008. This year, ExxonMobil plans to give $24 billion back to shareholders in the form of buybacks and more than $8 billion in dividends.
This despite the fact that, as my colleague Jim Jubak reported recently, Exxon's production is falling.
What about the future?
Certainly, there's nothing wrong with rewarding shareholders; that's what capitalism is all about. But we should all get a little uneasy when we consider what big U.S. oil companies are not doing with the current windfall.
They're not spending proportionately more wealth to develop new reserves. At a time when energy experts say gas prices are soaring in part because of a dearth of development over the past decade, this seems shortsighted and irresponsible. But that's what's happening.
Thanks to rising energy prices, ExxonMobil's free cash flow jumped 135% to $36.6 billion last year, from $15.6 billion in 2003. The company has hiked dividends 8.3% a year, annualized, over the past five years, according to Morningstar. The amount of money spent on share buybacks increased 427% to $31 billion last year, compared to 2003. But capital spending only went up 20% in the same time frame, to $15.4 billion
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