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Saturday, March 5, 2011

Oil Tax Breaks?

I’m an Exxon stock holder and get its annual report.  In 2009, ExxonMobil’s total taxes and duties to the U.S. government and its subdivisions exceeded $7.7 billion, an amount that includes ExxonMobil’s U.S. income tax expense related to 2009 activities of approximately $500 million. U.S. income tax expenses over the last five years reached almost $20 billion!
Furthermore, one only has to look at ExxonMobil’s previous tax bills to realize that any claim they don’t pay taxes is absurd.  XOM is one of the country’s largest taxpayers, having incurred a total U.S. tax expense of $60 billion over the past five years – a tax cost that exceeded XOM’s U.S. earnings in that same period by $19 billion. Simply stated, for every dollar of net earnings in the U.S. between 2005 and 2009, XOM paid almost $1.50 in taxes to federal, state and local governments.
Exxon is not only a large source of revenue for the government through taxes, but also invest substantial sums even in a weak economy. XOM made capital and exploration investments of $26.1 billion in 2008 and $27.1 billion in 2009, investing nearly $11 billion directly in U.S. operations during this time.   And for those who still say oil and natural gas companies “don’t pay their fair share” compared to other companies, consider XOM’s effective tax rate for 2009 was about 47 percent; a recent study found that the tax rate for U.S. oil and gas companies is about 20 points higher than the rest of the S&P Industrials.
Being in the asset management business I’m in, using FactSet I can look up company fundamentals.   From the S&P database Compustat, analysis shows that the 2009 income tax rate for U.S. oil and gas companies was about 48 percent, which was 20 points higher than the rest of the S&P Industrials.  Also according to the government’s own Energy Information Administration, from 2004 to 2008, twenty-seven American oil and gas companies, which make up under half the total oil and gas production in the U.S., paid almost $150 billion in U.S. income taxes.  Additionally, those companies paid other non-income taxes of more than $300 billion, for a total U.S. tax contribution to federal, state, and local governments of more than $450 billion.  Keep in mind, too, that Sec. 199, the manufacturing and production tax provision that is usually called a “tax break” for “big oil”, actually benefits other industries more than it does oil and gas companies.  When it comes to politics it’s time for truth to come out.  The oil industry pays far more than its fare share than most all other industries.
Moreover, Exxon can no longer “drill-baby-drill” wherever it wants to anymore, but if China National Offshore Oil Corporation (CNOOC) wants to drill in western China for instance, they will. The government will see to it with little or no environmental impact studies. In addition, the Chinese are forming tighter relationships with African governments that do not share Western multinationals’ worry about human rights violations or environmental concerns. A terrific “pro” example of this occurred during Exxon’sMay 26, 2010, annual meeting, where shareholders nominated the following proxy votes:  Special Shareholder Meetings (shareholders can call a meeting whenever)
1.      They can get a quorum rather than wait for Exxon to host one
2.      Reincorporate in a shareholder-friendly state
3.      Shareholder advisory vote on executive compensation
4.      Amendment to the equal opportunity policy
5.      A new policy on water
6.      Wetlands restoration policy
7.      Report on environmental impact of oil sands
8.      Report on natural gas production: impact of fracturing on environment
9.      Report on energy technology concerning climate change and fossil fuel impact
10.  Greenhouse gas emissions goals
11.  Planning assumptions
Would you think CNOOC has to deal with these kinds of shareholder nominated proxies? Now, not commenting on the worth of these individual shareholder-promoted proxies, consider the amount of time and attention they require from management and their related costs. It is a huge disadvantage to be a Western multinational doing business globally compared to CNOOC and Sinopec’s (SNP) responsibilities. These state-owned multinationals are not legacies of Communist central planning, either. They are very capitalistic and put profits first in their business activities, empowered and oftentimes aided by their government. One common thread apparent every day in the media is emerging among Western-style developed economies, and that is their increasing loathing of natural-resource usage. This is demonstrated, not only by their increasing legislation to raise royalty taxes and banning offshore oil usage, for instance, but also by losing the political will to allow market forces to meet global demand in the energy sector.
The real danger is that if the developed countries do not allow supply to meet demand through the use of Western multinational energy companies, China, Russia, and Brazil will. They will bridge the gap with other ideas, not necessarily free-market-based and not necessarily as environmentally conscious either, because they are willing to prioritize strategic concerns over economic returns and are open to dealing with pariah regimes. In addition, events like the BP oil spill in the Gulf of Mexico in April 2010 which drastically curtailed deep-water oil drilling for some time, as the Obama administration reacted irrationally to this situation. Unfortunately, when the United States discontinues using its own oil resources, the most likely benefactors are Russia, the Middle East, and Venezuela, which are left to fill the void that nature abhors. Those candidate countries are the reasons U.S. politicians give for funding alternative energy methods to ease our energy dependence in the first place. And by closing down oil lease sites in the Gulf of Mexico or offshore of the Carolinas, we play right into Chavez’s hands and actually put money in his pocket, which he then uses to destabilize the United States in Central America.
We should be asking the question:
Is the planet better off with natural resources in the hands of publically traded and transparent companies, investing in free-market principles, subject to shareholder scrutiny, free of the risk of too much government interference?
Or is it better off in the hands of multinationals run by foreign governments, opaque to their inner workings, less subject to profit motives (leading to higher investment because they do not need to maximize shareholder wealth and can accept lower return) and market forces, and beholden to national interests?
For the foreseeable future, we believe that current political forces will continue to serve to cripple Western resource reserves while forcing much higher capital investment to maintain and build reserves, and that this will continue unabated. This will again serve to give ascendancy to the foreign multinationals versus their Western publically traded alternatives.
Lastly, the chart below has the Russell 3000 companies breakdown by industries.  It shows the average amount of 2010 income tax these industries paid, divided by pre-tax income in yellow and divided by operating cash flow in green.  The two bars outlined in black, the 9th pair from the left, shows energy paying one of the highest ratios.

Moreover, if we divide these 3000 companies into economic sectors as shown in the plot below, we plot 2010 income tax paid divided by market cap and also income tax divided by revenue (sales).  Again look where energy falls relative to other industries. 

These charts come from Standard & Poors database.  They are the facts, not media distortions. 
The one last remaining fact is that the Western multi-national oil companies only control about 25%, that’s right 20%-30% of the oil these days.  The Saudi-Arabians, UAE, Nigerians, Libya, Venezuela, Norway, Russia, Chinese, Brazil, the west coast offshore Africa and other countries control and distribute the other 70% to 80% of the world’s oil and largely set the price of oil.  Before the OPEC oil embargo of the late 70’s, Exxon, BP, Occidental, Chevron, Sunoco, Amoco had much to do with the control of oil, but those days are long gone.  Exxon, the largest publically traded oil company, said recently that for every 100 barrels of oil it sold last year, it only replaced it with 95 barrels and is why it’s slowly moving into natural gas these days.  They cannot find any oil that isn’t under some country controlled by some pariah regime.  Most of the world’s oil is underneath sovereign nations these days as is most of any new finds and the Western multi-nationals just aren’t getting access to it.  These countries have their own oil companies and they’re running their own show.  A chart showing the world’s largest producers is below.

Take a look at the above data.  Exxon, the largest publically traded oil producer is what, number 14th on the list and look at its output versus National Iranian Oil Company.  All the “beef” people make about U.S. oil companies, demonstrates complete ignorance on the topic.
Another silly example of media charging oil companies with improper business practices, surrounds blaming Exxon on oil pump price gouging for instance, which can only be done if one is completely ignorant of the energy industry.  For all pump gasoline comes from refiners of which Exxon is a minor player, Valero and Sunoco and Chevron do most oil refining in this country as does BP.  A list of the top refiners in the world is shown on the next page, below where U.S. refiners are outlined in yellow.  Notice the largest U.S. refiner is number 6 on the list, meaning the top 5 largest refiners are “out-of-the-country” and not subject to U.S. environmental laws.  Also since the U.S. hasn’t built a new refinery in this country in over 30 years (EPA not allowed) gasoline is coming into this country from refiners outside of it, owned by again, by nations, not publically traded businesses.  So yes we have old out-dated refiners in this country, while China is building right now new ones right and left, just like they have 26 nuclear reactors under construction while we have none.  For the most part, the environmentalists will win their fight and drive oil companies out of the U.S., simply because they’re winning the miss-information war and turning the ignorant masses (who are getting more ignorant due to the state of the U.S. education system) into anti-energy if not anti-business, all under the guise of saving us from pollution.  This of course will make us more, not less dependent upon foreign oil and will serve to undermine the U.S. economy in the long run.