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How Big Oil Spends Their Bling

Written by Luke Burgess
Posted February 6, 2006

Dear Wealth Daily Reader,

Let's say you're a multi-national oil giant. You're making a lot of money. And we're not talking Bill Gates money because that's chump change to major oil companies. We're talking making more money than the GDP of several nations.

But what do you do with all that money?

It might be easy for you or me to decide what to do with all that cash. But for the major oil companies it's a whole different ballgame. They have shareholders and the media to answer to.

Massive profits would raise the eyebrows of zealous watchdog groups and would trigger shrieks of protest from politicians and consumer advocates furious with high gasoline prices.

In addition to that, when companies accumulate large amounts of cash, stockholders begin clamoring for a piece of the pie.

So big oil companies have to spend the money somehow and somewhere.

America's three largest oil firms have reported record earnings in recent weeks.

Exxon Mobil, for instance, reported revenues for 2005 at a mind-numbing $371 billion, the biggest revenues ever in the history of corporate America. $36.1 billion of that was profit.

With so much money gushing through the door, how are the oil goliaths spending it?

The Five Ps of Big Oil Spending

Pleasing Stockholders

A peek into the annual reports of ExxonMobil, Chevron, and ConocoPhillips shows one clear beneficiary -- any investor with a lot of stock in these three oil companies.

Big oil companies shower billions each year onto their stockholders.

Last year ExxonMobil spent $23.2 billion on its shareholders alone.

This figure wasn't all dividends. That amount includes money ExxonMobil spent to buy back it own shares to increase the XOM's outstanding stock's value.

However, the $23 billion represented a 56% increase from the year before.

Chevron investors received about $6.8 billion by the same measure, while ConocoPhillips shareholders got $3.56 billion.

And shares in all three firms increased significantly over the past two years.

Since 2004 shares of ExxonMobil have increased 50% while shareholders of Chevron and ConocoPhillips have seen returns of 41.8% and 99.3% respectively.

Pleasing stockholders is one of the top priorities for any public company. A happy investor makes for a good company.

Pursuing More Oil

With oil profits ballooning, oil firms are dumping billions into the quest for more oil.

The oil companies are frantically scouring the globe trying to find enough oil to replace all the barrels they've already sold.

For years, exploration spending remained relatively flat. The industry wasn't 100% convinced that prices would stay high.

It was that or they knew that one day soon global oil production was going to peak and send prices through the roof thus significantly increasing the market cap of these companies. I tend to believe the latter.

Now that oil prices are teetering at record highs, and extracting the oil from the oil sands in Alberta has become economical, all three American majors have significantly raised the amount they spent on equipment and the hunt for more oil.

For ExxonMobil, the price tag totaled $17.7 billion last year, up 19% from 2004.

Chevron of San Ramon spent $11.1 billion, a 33.7% jump. (that amount doesn't include Chevron's high-profile acquisition of Unocal) And Conoco spent $11.6 billion, rising 22.4% from the year before.

But while the oil giants' recent profits may be eyewatering, they will never have enough money to bring back the oil they've already produced.

Paying the Man

According to ExxonMobil's financial statements, the company paid a whopping $98.6 billion in taxes last year. Ouch!

Chevron paid $31.9 billion, while ConocoPhillips coughed up $28.3 billion.

And you thought you had it bad.

But some politicians and consumer advocates want the oil leviathans to pay even more in windfall taxes.

Although the idea faces stiff opposition from the industry and the White House, lobbying groups for the taxes say the money would help pay for research into new fuels to replace oil.

Paying the Boss

The CEOs of these oil companies are well compensated. Very well compensated.

According to the Forbes magazine, ExxonMobil's CEO Lee Raymond made about $25.8 million last year.

James Mulva of ConocoPhillips made about $16.8 million, while Chevron's David O'Reilly made roughly $8.2 million.

Even though these figures include the CEOs stock holdings, they're more than enough to make the public's blood boil. Especially when the average Joe is forking out $2.50 for a gallon of gasoline.

Politics

Ah, politics. We can talk about how big business spends money without including politics.

The oil industry has long been notorious for its lobbying influence.

According to the Center for Responsive Politics, the industry spent about $25.7 million on political donations in the 2004 election cycle.

ExxonMobil gave $935,016, Chevron handed over $499,242 and ConocoPhillips offered $372,828. All three gave more than 80 percent of their donations to Republicans.

The oil industry, however, isn't Washington's top contributor. Surprisingly it ranks 16th behind lawyers, doctors and real estate agents.

And so it is, big business in America always amazes John Q. Public. But to these guys it's just another day in the office.


- Luke Burgess
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