Friday, October 06, 2006

The Exxon Fallacy

I keep hearing people ask this question or pass this comment quite often these days. "How is it fair for Exxon Mobil to report a $30 billion profit per annum in 2005 , while gas prices had been sky rocketing? Can't they take a cut on their net income and pass their profits to the public through lower gasoline prices? Why is the government not taking any action?"

I was unclear about these questions too, until I stepped back and did some quick and simple analysis. So, what is Exxon first?

Company: Exxon Mobil (NYSE:XOM)
Primary line of Business: Oil and gas exploration
No. of employees: 123,000
Currently trading: $67.32
Market cap: $400.21 Billion (pretty big huh!)
Revenues: 2005 - $339 billion, up 25% from 2004 (again, largest by any company!)
Fortune 500 Rank: #1
2005 Profits: ~$36 Billion (I worked for a Fortune 150 company whose annual 'revenues' were ~$15 Billion. Just mentioning for a scale comparison)

The public wonder how can Exxon be allowed to make such enormous profits, while on the other hand gasolines prices are so high. Is it a fair policy to allow them to do so?
The answer is simple. Their profits are up, only becuase their revenues are up. If you take a look at their 2000-2005 financials,
you will observe that although their net income has grown at a CAGR of 55.23% ($17,720 to $36130) from 2000 to 2005, their net income as a percentage of annual sales has been relatively constant around 8-10% for the past 6 years. So, they have not done anything unethical or illegal to raise or artificially boost their profits. I've summarized this in the table below too.

2000 2001 2002 2003 2004 2005

Revenues $227,596 $208,715 $200,949 $237,054 $291,252 $358,955
Net Income $17,720 $15,320 $11,460 $21,510 $25,330 $36,130
NI % sales 7.79% 7.34% 5.70% 9.07% 8.70% 10.07%

And this increase is their revenues or sales, is primarily due to demand. Demand for oil and gas has been growing tremendously in these years, and that's not Exxon's fault!

Thus I argue that Exxon is doing a fair job. It's not its fault that there are 3 energy companies in the Fortune 10 list - with Exxon leading the way at #1, Chevron at #4 and Conocco Phillips at #6.



Anonymous Anonymous said...

So, are you suggesting that Exxon Mobil's profits are soaring, not because of the increase in crude oil prices, but because of the demand?

6:50 PM  
Blogger Padmanaban Kumar (paddu) said...

The short answer is, Yes.

But having said that, one must also keep in mind that demand is one of the key factors that drives the prices of crude oil.

2:28 AM  

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