Big oil spending more on stock buybacks than exploration. What could it possibly mean?

[GliderGuider]

Big Oil spends on search, splurges on investors

The five biggest international oil companies plowed about 55 percent of the cash they made from their businesses into stock buybacks and dividends last year, up from 30 percent in 2000 and just 1 percent in 1993, according to Rice University's James A. Baker III Institute for Public Policy.

The percentage they spend to find new deposits of fossil fuels has remained flat for years, in the mid-single digits.

The issue has become more sensitive as lawmakers and Americans frustrated by high gas prices have expressed concern over gaudy reports of oil industry profits. ConocoPhillips is scheduled to kick off the latest round of Big Oil earnings reports Wednesday.

Oil prices are set on the open market, not by the oil industry. But that hasn't stopped public protests, a series of congressional grillings for top oil executives, and a failed attempt by lawmakers to slap Big Oil with a windfall profits tax.

In the first three months of this year, Exxon Mobil Corp., the world's biggest publicly traded oil company, shelled out $8.8 billion on stock buybacks alone, compared with $5.5 billion on exploration and other capital projects.

ConocoPhillips has already told investors that its stock buybacks for April to June of this year will come to about $2.5 billion — nine times what it spent on exploration.

It's almost as though they know that the oil that's left in the ground isn't economical to extract, so why bother even looking for it? They seem to be paying off the shareholders and getting ready to fold their tents.

[peacetalksforall]

1. In the meantime, they have their pup pup puppets in the House and Senate and their

preaching reverend friends putting all the focus on ANWR - all designed to blame the little people Democrats while the gas companies get set up to screw us more royally. Rest assured their will be generous discount cards for pimps like Bachman and all those who proceded her.

And they are trying to take Gore out again.

[GliderGuider]

2. I have a slightly different take on this

I don't think the oilcos are getting ready to screw us. What's going on is they know something they're not telling us out loud -- that the end of the Oil Era is coming a lot faster than most people realize, and that there won't be much money left in the "oil bidness" a few years from now. The growing consensus from organizations like the IEA is that the pendulum is rapidly swinging away from Independent Oil Companies like Exxon and towards National Oil Companies like Saudi Aramco. As that happens there is less and less reason for the IOCs to stay in business.

If the IOCs don't diversify out of oil and become more general energy companies (i.e. get into renewables in a huge way) they will have a very small business base within decade. Unfortunately that is hard for them to do -- they don't have the infrastructure to support such a massive shift in focus, and doing that would send an even worse signal to the markets than these stock buybacks.

The oil era is rapidly winding down, and these folks know it. I suspect there is flat-out panic in Big Oil boardrooms these days.

[liberal N proud]

3. You are correct. They are not getting ready to screw us

They already have done plenty of that already.

They are getting ready to answer for the last 8 years of screwing us.

[GliderGuider]

4. I still don't get the "Oil companies are screwing us" meme.

- US oil companies don't set the world oil price.
- US oil companies are in a relatively competitive business.
- The price of gasoline in the USA is only 25% higher than the price of the crude oil feedstock.
- Out of that 25% come the oilcos' refining costs, distribution costs, fixed overhead and of course the gubmint taxes.

I fail to see where they are screwing anyone by making a 10% to 15% profit on a their product.

[madokie]

5. with exxon/mobil making over a billion in profits in a month, 40 billion in a quarter

I can't see how that figure you put up is only 10 to 15%. The price of oil used to have some influence on the price of gas and diesel but I'm not so sure that ratio is anywhere where it used to be. Where does the 10 to 15% figure come from anyway? is that off the top of your head, as they say, or is it a calculated amount. TIA

Just curious :-)

[GliderGuider]

6. Slightly more careful calculations

Crude oil costs about $130 a barrel. There are 42 gallons in a barrel, and 10% of the crude oil volume is lost during refining. So the raw cost of the crude oil feedstock for gasoline (and other refined products) is $130/42/0.9 = 3.44 per gallon.

Regular gasoline is currently selling for an average price of about $4.10 per gallon, so the gross profit is $0.66 per gallon, or 0.66/3.44 = 0.19, or 19% of the cost of the crude oil (which is less than my thumbnail calculation of 25%, since I didn't account for the refinery losses).

Gasoline taxes eat up 47 cents per gallon on average (according to http://en.wikipedia.org/wiki/Gasoline_tax), so that leaves 0.66-0.47= about 20 cents per gallon of gross profit. That's a gross profit (net of taxes) of 6% on the cost of the crude oil feedstock

Out of that 6% then comes refining costs, distribution costs and some portion of their fixed overhead, so the final profit margin is bloody close to break-even for gasoline manufacture and sale.

If oil companies are screwing you, you have to look elsewhere than gasoline sales.

[madokie]

7. all of that oil is not converted to gasoline or diesel is it?

what percentage of a gallon of crude is actually refined into fuel, that discripancy is going to blow those numbers out of the water aren't they? I wonder how that all breaks down. There is a lot of products that are made from oil with the last of the bunch being asphalt, I believe. Anyways thinks for the info so far and if you have any info to enlighten me on to the ratio of gas/diesel to crude I would forever be indebted to you, just kidding on the last part there. :-)

aren't some of the product from crude sold at a much higher price than gasoline, like naptha for instance, isn't that one of a pletora of by products of the refining process? As you can see I have very little knowledge of this but I do have enough to ask a few questions.

btw, Have a great day and thanks

I want to add: I still think we are getting screwn though, ok.

[GliderGuider]

8. Gasoline/diesel ratios vary by the type of crude and the refinery settings.

Typically, a refinery will get about 20 gallons of gasoline and 7 gallons of diesel fuel out of a barrel of oil. Since 10% of the initial barrel is lost, that 27 gallons represents a bit over 70% of the final output. The other 30% will include high-value fractions, but also lower-value fractions like asphalt.

The value of the other fractions is a consideration when calculating the total income of the oil company from all hydrocarbon products, but we were just looking at the portion of that income derived from gasoline manufacture and sale. For that purpose, it still makes sense (believe it or not) to calculate it as though the whole barrel of oil gets turned into gasoline. This is because the other fractions enter different income streams that are not under consideration here. Those streams may have higher or lower profit margins than gasoline depending on the market and applicable taxes.

[hunter]

12. You have to remember that modern fuels are largely a synthetic product.

It hasn't been a simple distillation process for many years now. If you are older you've almost certainly noticed gasoline doesn't smell the same as it did when you were a kid, and it's not just the ethanol and ether additives. The hydrogen rich components of old style gasolines, like octane and butane, have been superseded by synthetic components made from much heavier distillates.

[Howzit]

23. Surely the fact that a gallon of crude doesn't yield a gallon of gasoline

increases the input cost of the gasoline. Rather than boosting profitability, it eats into it.

[GliderGuider]

25. No, but the rest of that gallon yields other profitable products.

For the 45% of that barrel of crude that turns into 20 gallons of gasoline, the company will carry on its books 45% of $130, or $58.50 which is the cost of the raw material for 20 gallons of gasoline. For the 55% of the barrel that turns into "other stuff" the company will account for 55% of $130, or $71.50 which is the cost of the raw material for the other stuff.

The profitability of the product streams has to be considered independently. Each stream would "pay" (or account for) a pro-rated portion of the crude oil cost to cover its proportion of the raw material cost.

[Finishline42]

9. You need to refigure your numbers

Out of the 42 gallons of crude - typically between 19 and 20 comes out as gasoline. 9 gallons of distillates (this breaks down usually 7 gal of diesel 2 for heating oil) the rest goes to jet fuel, naptha, plastics, etc.

Actually, with some of the additives to help in the refining process, they get more than 42 gallons of product.

From the website below:

A 42-U.S. gallon barrel of crude oil provides slightly more than 44 gallons of petroleum products.

http://www.eia.doe.gov/kids/energyfacts/sources/non-renewable/oil.html#Howused

[GliderGuider]

10. I looked at distillate ratios briefly in the post above.

When considering just the income stream from gasoline/diesel, there is no evidence of a profit margin high enough to constitute a ripoff by Big Oil. As I said before, some of the other fractions will have higher value than gasoline/diesel, some will be lower, but considering just gasoline, the numbers are close enough to make my point.

And my point is that I do not believe the oil companies are ripping anyone off. Nobody so far has come up with numbers to the contrary. Now that's not the same as saying they are ethical -- I know of very few really large companies that could be considered ethical. But that's not the same as claiming they are driving up gas prices through some kind of collusion, or otherwise ripping off the American motoring public through gas pricing.

[Bigmack]

11. I appreciate

Your typical, rigorous logic and the thought you put into your posts, and I tend to "buy into" - or more properly put, be convinced by - the logic of your posts and arguments, but 'splain me this.....whence cometh the ENORMOUS profits of big oil these days? Demand, if not globally, at least here in these troubled states is down a wee bit, but their profits are up a GREAT bit. How come? Ms Bigmack

[Finishline42]

13. My Guess?

Fields that were developed long ago are still pumping. That oil has gone from under $20 to over $130. So while a large percentage comes from outside sources - there is a significant % that the oil companies control and get the benefit of current market conditions.

[GliderGuider]

14. Big companies make big profits.

Huge companies make huge profits. Exxon is a gi-freaking-normous company, so they make a profit that looks, in absolute terms ... um ... obscene. However, in 2007 Exxon declared total revenues of $390 billion dollars. They declared a profit of $40.6 billion, for an after-tax profit margin of about 10.4% As a standard of comparison, Microsoft declared 29% profit for last year (on one eighth of Exxon's revenues).

Now, you can perhaps assume that Exxon is cooking the books to lower their net income, but cooking them enough to drop their profit margin by 2/3 (from, say, the 29% that Microsoft owned up to down to their own declared margin of 10%) would probably earn them a raised eyebrow from the SEC. If Microsoft has to declare 29% profits, I'm pretty sure Exxon's financial statements are within spitting distance of reality.

Is 10% a reasonable profit? The absolute dollar figures are huge, but as a percentage of total revenues they seem quite reasonable.

[Bigmack]

21. Yeh, well....

I'd be REAL happy with 10%, and once again, your analysis rings....if not "correct," certainly plausible.... Thanks for the time/trouble - Ms Bigmack

[Howzit]

24. Your post doesn't take the obligatory jab at BigOil

Get with the program :)

What percentage of the gas price is tax and how does this compare with oil company profit?

[GliderGuider]

26. Gasoline taxes in teh USA average about $0.47 cents per gallon.

That's about 12% of the pump price, and just a smidgen higher than Exxon's declared profit margin.

[Howzit]

27. Why don't we hear about this exorbitant gouging and ways to stop it? N/T

[GliderGuider]

28. Ah. It's because gasoline taxes are only 47 cents...

But last year Exxon made Forty Billion Dollars! See how that works? 47 cents is insignificant, but 40 billion dollars is obscene...

I think I hate innumeracy even more than poor spelling.

[Howzit]

29. You mean, Americans can't multiply or divide? Or are just too lazy N/T

[depakid]

15. "there won't be much money left in the "oil bidness"

Not sure why they'd be buying back their own stock under the circumstances.

Wouldn't it be better to have other investors holding the bag, rather than increase their percentage of shares if their business is likely to contract?

[GliderGuider]

16. It might matter who the investors were.

You're right, oilcos don't care much for widows and orphans, but I wonder if they're making sure the big investors are getting cashed out?

I'm not a financial wonk, so I don't know the ins and outs of stock buybacks. It's just darned odd that they're doing that with their money rather than plowing it back into "profit-making" E&P...

[GreenPartyVoter]

18. Yeah, why buy stock in a dying business? Maybe they know something we don't. Maybe

they have more oil than we thought or they are about to diversify in a big way.

[kristopher]

17. Don't disagree, but think something is omitted relative to profit.

Don't disagree, but think something is omitted relative to profit.

The 'oil companies' actually pump oil out of the ground also. So beginning their revenue stream at the refinery is missing a large part of the picture.

That doesn't change the point of the OP, however.

[GliderGuider]

19. What's your take on Exxon's profit margin?

They claimed 10.4% last year. I'm inclined to take them at their word, but others are not so generous. Do you think they're cooking their books? After all, that profit has to include what should be lower-cost crude from older wells, as you point out. They're spending less than 1.5% of total revenues on exploration -- that doesn't sound like a sustainable business model for an oil company...

[kristopher]

20. I really don't know...

But bear in mind they are the ones that fund the GW denial machine, not it's target. They know the truth and that truth says putting money into exploration at this point in the game might not be a wise use of funds.

[Bigmack]

22. Now THAT rings REAL true

and several posts on the oil drum of late would support THAT take on recent twists in the old oil road.... Ms Bigmack