Posted on 11/09/2005 7:16:55 AM PST by libertarianPA
WASHINGTON - The chiefs of five major oil companies defended the industry's huge profits Wednesday at a Senate hearing where lawmakers said they should explain prices and assure people they're not being gouged.
There is a "growing suspicion that oil companies are taking unfair advantage," Sen. Pete Domenici (news, bio, voting record), R-N.M., said as the hearing opened in a packed Senate committee room.
"The oil companies owe the country an explanation," he said.
Lee Raymond, chairman of Exxon Mobil Corp., said he recognizes that high gasoline prices "have put a strain on Americans' household budgets" but he defended his companies huge profits, saying petroleum earnings "go up and down" from year to year.
ExxonMobil, the worlds' largest privately owned oil company, earned nearly $10 billion in the third quarter. Raymond was joined at the witness table by the chief executives of Chevron, ConocoPhillips, BPAmerica and Shell Oil USA.
Together the companies earned more than $25 billion in profits in the July-September quarter as the price of crude oil hit $70 a barrel and gasoline surged to record levels after the disruptions of Hurricanes Katrina and Rita.
Raymond said the profits are in line with other industries when profits are compared to the industry's enormous revenues.
Nothing's beneath me :)
Their shareholders bore a lot of risk. It's perfectly reasonable to have cash returned to them. Buybacks are the most tax-efficient way of doing it.
.....Their shareholders bore a lot of risk. It's perfectly reasonable to have cash returned to them. Buybacks are the most tax-efficient way of doing it.......
Any shareholder can cash out at any time they please, short time or long term. Buyback or Sale is only a timing issue.
I believe that XOM should be focusing their future on their core businesses, investing as much cash as possible on both finding petro's, and converting the raw petro to marketable product.
I have absolutely no problem with any company making great profits, as they then incur great tax burdens, but I do have a problem with a potentially great growth company buying back stock at the highest prices in its history, to forego a 2.+% dividend.
There's got to be a better investment, even if they loaned their cash at say 7%, or, maybe even built a new refinery!
To retern money to shareholders on net, you either have to do a buyback or a dividend. Yes, an individual shareholder can cash out without one, but another shareholder has to "cash in" for this to happen. It's only with a buyback or dividend that shareholders in the aggregate can cash out.
And from a tax standpoint, a buyback is better than a dividend, as I will explain below.
I believe that XOM should be focusing their future on their core businesses, investing as much cash as possible on both finding petro's, and converting the raw petro to marketable product.
Apparently XOM's management doesn't think so. Very often, companies have more cash than they have investment opportunities. In such cases, giving cash back to the shareholders is exactly what they should be doing.
I have absolutely no problem with any company making great profits, as they then incur great tax burdens, but I do have a problem with a potentially great growth company buying back stock at the highest prices in its history, to forego a 2.+% dividend.
A repurchase is practially the same thing as a dividend. It just returns money to shareholders. The difference is that Uncle Sam gets less of the repurchase than the dividend.
Think of it this way. 100% of the dividend is taxable. However, if you tender some of your shares in a repurchase, you only pay taxes on the difference between what you receive and the cost basis.
Why firms pay dividends at all is one of the great puzzles of Corporate Finance, BTW. In theory, they should only be doing buybacks.
There's got to be a better investment,
The shareholders can use the money they get out of the repurchase to make that investment.
even if they loaned their cash at say 7%
Tender some of your shares, and you can do the same thing with the proceeds.
or, maybe even built a new refinery!
Good luck getting regulatory approval.
No, No, No!
You're looking at the equation from a short term shareholders view;
The Board must look at the investment alternatives from a much broader and longer point of view.
What's best?? I've got 30 billion in cash.
1) Do I try to assure the best long term outlook for the company, by re-investing my cash in my core businesses, within my risk tolerance, thus (potentially) benefitting current and future shareholders, thru company growth,
2) Or do I take a big chunk of my cash and buy-out the present shareholders???
3) My business is returning a 20% ROI, My stock represents a 2% cash dividend.
I don't think it makes sense to try to justify a 2% cash dividend savings, while my core business has the potential to earn 20% on an incremental investment. XOM's Board should have looked at all alternative investments to make the proper investment decision. It appears that they decided that a known 2% cash dividend reduction by buying back stock (at the highest market price in the company's history, by the way) was the best investment alternative, rather than funding the future growth of the company.
Shame on them, as juicing the EPS to enrich current stockholders to try to boost market share pricing, at the expense of finding and developing future corporate growth, is a very shortsighted strategy.
But then fat-boy Raymond, age 66, is about to retire, owning about 4.5 million shares, so let's give him a nice payday!
No I'm not.
1) Do I try to assure the best long term outlook for the company, by re-investing my cash in my core businesses, within my risk tolerance, thus (potentially) benefitting current and future shareholders, thru company growth,
If you have investment opportunities with an expected rate of return that's high enough to compensate for their risk, then sure.
But there's no reason to assume that XOM has enough such investment opportunities in which to pour all its cash. $30 billion is a lot of cash, and I seriously doubt a mature company like XOM has that many good investment opportunities.
If you don't have enough good investments for that $30 billion, then the best thing to do is to return it to the shareholders via a buyback. If they don't return it, they'll waste it.
2) Or do I take a big chunk of my cash and buy-out the present shareholders???
You could pay a special one-time dividend, but that's not tax efficient.
3) My business is returning a 20% ROI, My stock represents a 2% cash dividend.
The reason why the dividend yield is so low is because XOM (and other companies like it) use share repurchases instead of dividends. The two are economically identical. The only difference is that share repurcahses get favorable tax treatment.
I think you are failing to grasp the fact that a repurchse is NOT an investment.
I don't think it makes sense to try to justify a 2% cash dividend savings
I don't follow you.
while my core business has the potential to earn 20% on an incremental investment.
You're assuming that all new investments will have the same rate of return as existing investments. That's a bad assumption. Ever heard of the law of diminishing returns?
XOM's Board should have looked at all alternative investments to make the proper investment decision.
What makes you think they didn't?
It appears that they decided that a known 2% cash dividend reduction by buying back stock (at the highest market price in the company's history, by the way) was the best investment alternative,
No, they determined that there weren't enough good investment opportunities to consume $30 billion, so they decided that the best thing to do was to return that money to shareholders.
The current price of the shares is not relevant to this decision.
rather than funding the future growth of the company.
Growth for its own sake doesn't create value. If your growth options aren't going to generate good returns, then you should't take them.
Shame on them, as juicing the EPS to enrich current stockholders to try to boost market share pricing, at the expense of finding and developing future corporate growth, is a very shortsighted strategy.
Devolopment of future corporate growth gets factored into the stock price. If in fact XOM were giving up valuable growth opportunities to make the repurchase, then they're stock price would have taken a hit.
.......No, they determined that there weren't enough good investment opportunities to consume $30 billion, so they decided that the best thing to do was to return that money to shareholders.
The current price of the shares is not relevant to this decision.......
It's dinner time so I don't have an opportunity to delve into all your assertions, but:
I'm a company with $30 billion:
Do I;
1) Buy back shares to save 2% dividend,
2) Do I keep it in cash and earn 7% interest,
3) Do I look at the long term investment opportunities
and invest in them now, or in the future??
XOM decided on #1; enriching their current stockholders and current managemment!
I say, Bad strategic Choice!
Who is going to line up the congressmen and make them explain to Americans their reckless, runaway spending of our tax dollars?
My husband works for one of the above mentioned oil companies and I have to say that we think at least one of the companies that were mentioned is guilty as charged.
BP is actually trying to blackmail the state of WA into loosening restrictions on the number of tankers that they can bring into the Puget Sound. We were actually flabbergasted by the arrogance. We already had some concerns over the pricing of the gasoline in the Northwest, which is controlled by BP, but now we have to ask if they are trying to sabotage the other oil companies which operate the west coast, at the expense of the consumers. We have a lot of evidence to this effect.
The company exists for the sole purpose of enriching its shareholders.
It is when they all get together and agree to not compete with one another, agree to charge the same price for their product when some could charge much less sense the do not have the same overhead, agree not to build any refiners although they don't need them because the demand has not increased that much since 1978 [18.9 million barrels a day] in the U.S. much to my surprise.
To hear then tell it you would think we were using three or four times the oil that we used in the 70's
It actually decreased quite a bit for the next number of years with a peak low of [15.2 in 1983 and was still below that level in 1997 at [18.6].
I think we did get up to 20 million in 2002 but with the steady price increases since President Bush took office I think they are back to the 18 million mark again.
This is the reason they haven't built any refineries. They haven't needed them.
If they needed them to keep making profits they would certainly build them.
We haven't been told the truth.
But they didn't tell us the truth back in the 70's either.
They said we would use up most of the world's know reserves by the late 80's.
The only people buying this illegal price fixing crap are those who are making money off of it directly or indirectly though the stock market and their portfolios.
It's not demand that driving these kind of price increases all at once but illegal and unethical business practices and they're hurting a lot of people and other businesses.
I went through both of these uncontrolled greed trips. It took congressional hearings and heat on our politicians to get it stopped the last time to.
.Just like now just as soon as the hearings where about to start and while they were going on the prices started to drop.
since the 1900 the oil companies have held this country hostage and have to be reined in ever so often to keep their greed from causing an economic collapse to the country.
If we don't they'll let their greed destroy the country and themselves along with it.
Once you go too far it not as simple to just lower the price and everything is back to square.
It takes a lot longer to heal a crippling wound that it does to strike it. Sometimes the blow's effect is much deadlier than anticipated.
There's no evidence of collusion. Prices went up because there was a supply shock. A negative supply shock or positive demand shock will send prices up in a competetive market, even if overhead doesn't change. Take some economics.
agree not to build any refiners although they don't need them because the demand has not increased that much since 1978 [18.9 million barrels a day] in the U.S. much to my surprise.
Environmental regulation has stopped refinery building. The oil companies would build dozens if the politicians would allow it.
Avg profit per gallon of gas = 7-10 CENTS per gallon.
Avg tax per gallon of gas = Approx 45 CENTS per gallon.
So I ask, WHERE IS THE FAT?
Someday my friend, Atlas will shrug.
I hope so. I hope so.
Maybe, WA state has too many regulations because they pander to enviro-whackos and BP is doing whatever it can to make Puget Sound work for them so they don't have to move their operations? If I have to choose between a greedy oil company and a state that has embraced socialism, give me big oil!
And those who have a basic understanding of economics.
since the 1900 the oil companies have held this country hostage
Fascinating theory. One question: why does this all-powerful cabal ever permit the price to fall?
BP panders to the enviro wackos, they support the Kyoto treaty and oppose drilling in the ANWR. The compromise that BP has offered was to close down a tanker route out of the sound. Giving up a tanker route out of the sound, does not effect BP because BP is not allowed to operate tankers between US ports. So essentially, BP offered a compromise that would handicap other companies and not effect BP at all.
If BP simply wants to be allowed to run bigger tankers in the sound, they are going about it the wrong way.
You're kidding right?
What's the matter with you people don't you ever think or do you just accept everything these people who are picking your pocket tell you ?
Do you really think that the only place on the planet they have refineries is inside our borders?
If they wanted to build refineries they could build all they want in Mexico where they have sent most of our factories and chemical plants using cheap labor and have no environmental laws or restrictions to slow them down.
Where do you think the rest of the world gets their refined oil from?
They have hundreds of refineries overseas and can build all they want and a lot cheaper than they can here.
Since Congress killed the law the oil companies had on the books to keep oil refined in other countries out of the U.S. the Saudis have started shipping gas ready to go here.
Now we don't need refineries here.
The reason I repeat they haven' done it is they don't need or want to.
They own most everybody in Washington on both sides of the aisle.
If they wanted too,with as much clout as they got and the way the courts are ruling in favor of business lately they could build one in your living room.
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