ExxonMobil reported profits of nearly $11 billion on April 29th for its 1Q08, outpacing their first quarter earnings from 2007 and putting the oil giant on pace for the largest annual profits in history. Exxon’s first quarter profits for 2008 exceeded by $1 billion the $9.3 billion profits the company made in the first quarter of 2007, pacing the company towards easily topping the record $40.6 billion in profits the company made last year.
After posting $123 billion in combined profits last year among the top 5 oil companies, the oil giants spent $50 billion last year on stock buybacks. At the rate of current stock buybacks, Exxon will have no publicly held stock within 15 years. In fact, they are all likely to be privately held by 2030. In 2007 ConocoPhillips, the third-biggest U.S. oil producer, announced plans to buy back as much as $15 billion of its shares through 2009. Over the next three years, Chevron also plans to re-invest $15 billion in itself through a stock buyback program.
Meanwhile, oil companies are cutting back on capital expenditures. Last year ConocoPhillips cut its capex by 25% and this year it expects to cut its capex another 15%. ExxonMobil is also making few investments. It plans to spend a mere $100 million over the next decade on research and development on alternative energy sources.
This is probably a bit upsetting to you given the high price of oil, which yet again skirts the $120 a barrel threshold. In periods of high oil prices, such as the one we find ourselves in today, the oil & gas sector is generating significant excess free cash flow, that is cash after capital expenditures and dividends. But frankly this is what dying industries do. They are cash cows milking their prior investments for the benefit of their shareholders.
But here is my point: if we are to solve the world’s energy problems it is not likely that the oil companies who will be the ones to do it. Those solutions will have to come from elsewhere in the marketplace. It is another reason to tax oil companies for windfall profits at rate of approximately 30% and to then invest those receipts in alternative energy investment. You see cash cows can be good for something. We should milk them accordingly yet be mindful not to slaughter them prematurely either.