EXXON Mobil: Whose Devil?

July 28, 2006   

Exxon Mobil can't do anything right, it seems. First there was the Exxon Valdez disaster, and now they're making record profits  --  no one likes big mean evil people to make record profits. (Okay, there were some other things going on between 1989 and now, like spending millions in lobby money to corrupt the American political process and earn countless dollars in tax subsidies in the form of highway projects and absurdly insider written energy policy, but who's counting?)

Anyway, the morals of investing in Exxon seems to come up a lot in family investment discussions, so I thought touching base with you all on the issue could be productive, if not educational for all of us. Instead of going into too much prose on the subject, I thought a little socratic method would help break into the subject; so let's start:

What business is Exxon Mobil in?

According to the Company's website, Exxon Mobil is in four main businesses: Exploration & Production (Upstream), Refining & Marketing (Downstream), Chemical, and Technology.

Where does it make the most money?

Of its $99.03 billion of revenue in the second quarter of this year (WTF!!!!), it came away with $10.4 billion of profit (WTF!!!!). $6.9 billion of that profit came from upstream (drilling, exploration, wholesale selling) division. Downstream (your gas station) made them $2.5 billion.

Are Exxon's profits directly linked to the price of gas?

Directly? Kinda. When the price of crude oil goes up (something decided by global market forces, not Exxon or anyone else, despite common belief), Exxon can charge more for the oil discovered in their upstream activities (their bread-and-butter division). Look at it this way: if you had a garden of lettuce and 10 employees, it would cost you "X" amount of dollars to grow the lettuce and pay the employees. If for whatever reasons the price of lettuce spiked (say your neighbor's farm, comprising 10% of all lettuce supply, got invaded by a crazy Bush, destroying his crop), your lettuce would then be more valuable and you could sell it for more money while keeping your costs at "X", making you a greater profit.
While in this sense higher prices give Exxon more profit, in the long-term it might not be so easy. If higher prices are partially caused by scarcity of resources, it would mean that finding oil is getting harder and harder to do, thus making the enterprise more costly (imagine if lettuce became harder to grow and you had to hire twice the employees and buy twice the land to grow the same amount of, now more expensive, lettuce). Zero sum game.

Who owns Exxon?
You do. :-)
(perhaps you do). Better said, we all do. Technically speaking, 1,451 institutions hold 3,156,802,560 shares of XOM (Exxon's ticker). That's about half of its total shares outstanding. But out of this handful of institutions, you can be assured that approximately 4 million American's hold shares of the Company's stock, mostly in the form of their pension or 401(k) (the top three holders of the stock (Barclays, State Street, and Vanguard) are titanic mutual fund and index fund providers). What about the other half? Retail investors. Your neighbor, your friend, your co-worker. In fact, Exxon is one of the most widely held stocks, with a very high "float," meaning "insiders" (company directors) own very little compared to their peers.

Is Exxon evil?
In short, probably. They have a pretty tarnished record, but most of their bad reputation comes from the fact that you dump loads of cash into their company when you fill up your tank and then see them make a record profit. Your loss, their (our) gain. If you do think they are evil -- which many many reasonable people do -- your slate is still not easily cleaned by saying "I'm not going to invest in them or buy their oil." As discussed, when you buy gas, you make the resource more scarce and drive demand higher, thus making prices and profits (in the short-term at least) higher for all companies, including Exxon. You buy BP's gas and Exxon will still make money. Shit happens. As for investing or not investing in Exxon, that's a crap-shoot too. If you don't invest in them they would still own some pretty valuable resources. With some companies, if there's a mass exodus of shareholders, the company goes broke (like "dot-coms" and other speculative industries); but with Exxon, and other big oil companies, the company's value is linked very closely to the hard assets it has, and most speculation is calculable from an geological and political stand-point (the question isn't "Will consumers like Exxon's gas? It's: Will there be oil down in that hole?). Probably there will be, and they will make money off it depite the share price.

The moral of the story (at least for me) is this: Exxon's gonna drill for oil, sell it, and then make loads of money some years, and suffer other years (like the late 90s). As an investor, we have to ask if these guys are going to continue making money, and if so, let's take some of that profit away from them (as shareholders) and go do some good in this world, like we Westheimers know how to do.

I know this post will bring some good feedback, so let's hear it. What do you think about investing in Exxon?

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