Friday, November 11, 2005

Don't Hate Us Because We're Evil

At lunch this week a friend asked me, "Do you believe what the oil industry is saying, that they need the profits they are creating because they have to reinvest it into rebuilding and oil refineries?" Although I'm not a fan of the oil and gas industry I told my friend that I couldn't make any assumptions about that until I looked at some financial statements to see what they were doing with retained earnings, etc.

So, I went to and among other things I found this cute flyer that included today's graphic. I just had to show you the chart because to me it is simply crying out, "Don't hate us! Look at who is eviler! LOOK AT THE BANKS! BIG PHARM! HATE THEM! HATE THEM!!"

Their opening statement on the flyer is:

"The oil and natural gas industry is probably the world's largest industry. Its revenues are large, but so are its costs of providing consumers with the energy they need. "
Hmmm, so let me see if I can use that education for which I'm still paying off student loans. You're saying that it is a high volume/low margin industry aren't you? In fact, you're bordering on whining that helping us get what we "need" is just about breaking your bank. *Sniff* Try not to notice *sniff* our executive bonuses *sniff* it's all about the children and what they neeeeeeed. (Insert picture of small child and cute puppy here. Snuggling a gas pump.)

Don't let that "high cost" (but high volume/low margin) whining get to you. You know what other high volume/low margin industry you may be familiar with? Bargain or "discount" retail. Because a few of the big boys kept it "all in the family" you see things like positions 4 through 8 on The Richest People In America (Forbes) occupied by the name Walton. Yes, 5 out of the 10 richest people in America make their money on high volume and low margins. If you go to the International list (The World's Billionaires) you get a couple of brothers who own Europe's biggest discount retail supermarket chain. The Albrechts (Karl and Theo) have slipped a bit because they used to kick the Walton's butts.

And may I just say that when you read the opening paragraph on that Billionaire's link, "The collective net worth of the world's 691 billionaires is $2.2 trillion, up $300 billion from the combined net worths of the 587 people listed last year," don't you have to ask yourself.... Why is there world hunger again?? I can think of a lot of useful things to do with $2.2 trillion dollars, how about you?

Where was I? Oh, right, oil industry. Reinvestment. So I reviewed the ExxonMobil 2004 financial statements on the theory that they were most of the industy and a good place to start. It's been a couple of hectic days since then but what I recall is that their earnings more than doubled from 2002 to 2004, as did their retained earnings and dividends. They do retain earnings and their payout of dividends agains earnings per share is something like 1.69 against 3.84 (but don't quote me) and they reflect reinvesting earnings in the statements.

What are they spending that money ON? Well, that's a good question now, isn't it? From what I could see I think that they redistribute overhead against the business functions so I couldn't easily see how to tease out things like EXECUTIVE COMPENSATION. I'm sure that multi-million dollar bonuses for the CEO can get lost in the "noise" of a multi-billion statement. Except that for me it doesn't. I have the same rule for business that I do for government - I don't mind paying for your service so long as you are prudent with the money. A lack of prudence puts my panties in a wad.

So what about executive compensation? According to this site:
ExxonMobil CEO Received $38 Million in Bonuses, Despite Soaring Oil Prices. According to the Associated Press, "Buoyed by high oil prices, Exxon Mobil Corp. had a record-breaking year in 2004 and chairman and chief executive Lee R. Raymond shared in the company's success with a $38 million compensation package Exxon said that Raymond, 66, was paid $7.5 million in salary and bonus plus restricted stock worth $28 million and nearly $2.6 million more in other compensation and incentives, according to Exxon's proxy filed Wednesday with the Securities and Exchange Commission." (AP, 4/13/05)
Although we see all these numbers flashing by all the time - millions, billions, trillions - let me point out that $38 million is equivalent to every man, woman and child in America sending him about 12 cents. Let's just round and say it's two-bits per four-person family. What in the hell did he do for me that was worth a nickel, much less two-bits? Can I fire him? Vote him off the island? Have the Three Ghosts visit him and scare him straight?

What I told my friend at lunch is that I have no problem with a company seeking rational profit. To me rational profit is that win-win balance of a symbiotic relationship between company and community. Basically nobody gets too screwed. Any year when two of the big headlines focus on (1) amazing profits for what is essentially a utility industry, and, (2) amazing increases in poverty, there is obviously something amiss. I think we have ventured into the land of irrational profit.
Update 11/25/05
For more oil industry info check out Schroeder's post Bush petting session with Saudi prince.