I've mentioned in previous articles how ridiculous it is that Exxon is valued at $423Bn, having added $200Bn in market cap since 2004.
Heck, the company was trading at $57.50 in January of last year when oil was at $65 a barrel, on it's way to a summer high of $79. In comments today Pitch78 mentioned how Cramer said he was "blindsided" by the COP disclosure of poor margins after saying "a lot of really good things at its meeting a few weeks ago."
Yeah, well if my due diligence on a company consisted of listening to the management's outlook, I'd be "blindsided" a lot too! The management of Conoco Phillips, Exxon, Chevron are no smarter than the people who run our government. They stepped into the helm of huge, profitable mega-corps with the general instructions that they should not screw it up and they would keep making money just like the last 20 CEOs did.
They all just happened to be in the right place at the right time this decade when their commodity got hot.
We won't get into the reasons behind HOW they got hot, let's just say that a confluence of global economic and political events came together and caused a fortuitous increase in the value of their commodity – and please ignore the man behind the curtain!
Let's just say that our pals in the oil industry took full advantage of the situation to maximize profits!
Now the party is winding down and suddenly the pressure is on for these guys to do something smart… It ain't going to happen! COP already did something monumentally stupid, buying Burlington Resources for $36Bn last December, when natural gas was trading at $14 (now $6) and, more importantly, paying a valuation that was THREE times higher than the valuation of Conoco's own reserves. At $92 a share, COP bought Burlington at the top AND gave them an extra $6Bn.
What does that have to do with Exxon? Well Exxon, since 2004 has gained the ENTIRE combined market cap of Conoco/Phillips/Burlington ($112Bn), plus Suncoco ($7Bn), plus Suncor ($12Bn), plus Valero ($30Bn), plus Halliburton ($29bn) plus Nabors ($9Bn) plus Chesapeake Energy ($12Bn) and still has enough left over to pay executive bonuses second only to Goldman Sachs!
What a company!!! "How did they do it?" you may ask:
- Did they discover more oil? No, Exxon does less exploration than any major oil company.
- Did they improve operations? No, operating costs per barrel are way up.
- Did they increase market share? No, the majors are losing market share across the globe.
- Did they produce more oil? No, Exxon's production is in steady decline.
- Did they double their profits? No, Exxon's profits are up 40% from 2004
So how do they do it? Well, it seems the mighty mighty Exxon corporation has pursued a single, simple strategy to go from being a $200Bn company to being a $424Bn company (was $453Bn last week) in just 3 years- Buying back $55Bn worth of their own stock! In the past 4 quarters, in which Exxon generated an amazing $55Bn in cash by gouging the consumer finding the perfect price for their product, all but $3.5Bn of that money was spent on purchasing their stock (75%) and dividends (25%).
So when you wonder just what sort of nutjobs were buying XOM stock up to $79, even while the price of oil was plunging – now you know! The biggest buyer of Exxon stock in 2004, 2005 and 2006 is Exxon and now, as Howie Mandel likes to say, let's see if they made a good deal:
They are already guiding flat sales ($398B vs. $3876B) for ‘07. They made $40Bn this year so let’s say costs are $350Bn.
RIG projects a 100% increase in profits, SLB expects a 20% increase in profits… so you know their costs will go up – let’s say just 10%, which will include labor, health, materials, shipping, rentals, inflation, the Dems actually making them pay their taxes… let’s say it’s all just 10%.
That’s still $35Bn in additional costs. That means they net out $388B in costs on $398Bn in sales, a far cry from $40Bn!
Since they sell oil, we can also assume that they were assuming oil would not drop significantly in price from this years average of $65. Oil averaged $55 in ‘05 and the company “only” had $370Bn in sales and $36Bn in profits.
So we have a few interesting things going on here: When XOM went from ’04s $298B/25B to ‘05 $370B/36B the stock rose from $50 to $60 (20%) but, this year as the stock goes from ‘05 $370B/36B to $387B/40B the stock jumped from $60 to $77 (28%).
Meanwhile they’ve been buying back stock but they’ve run their A/P up from $46Bn to $54Bn with total liabilities up $10Bn since last year.
In 3 quarters so far this year $29B in net income has only translated to $4Bn of cash flow, if this were my company I’d be asking a lot of questions about how come the money we make doesn’t seem to find it’s way into a bank!
Lastly – If the company took in $370Bn when oil was at $55, how come they “only” are taking in $387Bn with oil at $65, its an 18% increase. Conclusion: Unit sales are down! What happens if the price increase doesn’t stick and unit sales don’t pick up?
This does not sound like a good deal at all! Now we come back to the old, reliable Roach Motel Theory where we have $424Bn worth of shareholders trapped in a company that may only be worth $300Bn. What happens to those investors when Exxon stops buying back shares? The company already spent almost $30Bn this year buying stock at an average of $68 per share. If the stock drops to $61 that means Exxon blew $3Bn on a bad stock deal and the rest of the $26Bn (we'll ignore the $27Bn they spent in '04 and '05) is tied up in a very illiquid position.
It's not all bad news for Exxon though. They managed to weasel out of paying for part of that Valedez oil spill after 15 years of appeals and they're making some great progress in the field of denying global warming so let's hear it for one of America's greatest corporations as they sink back to the levels they so richly deserve.
