Houston to Obama: Smell the Oil 55 comments
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Anything can sound right, especially when articulated by a pro, but doesn't always pass the smell test. As a Democrat, I want to think that my party can do no wrong; however, the harsh reality is that no one gets it right all the time.
Lately, several Democrats including presidential candidate Senator Obama have been advocating the idea of a windfall profits tax on oil companies. Sparked by the unprecedented quarterly profits reported by Exxon Mobil (XOM) the theory goes that oil companies that make a lot of money should give some back to the public or be taxed an additional amount to further subsidize the development of alternative sources of energy.
It sounds good and is gaining popularity with the general public. However, it smells to high heaven! Exxon Mobil (XOM), Chevron (CVX) and ConocoPhillips (COP) all compete with each other and several others like BP plc. (BP) Total (TOT) and Royal Dutch Shell (RDS.A). But that is only half the story. All compete as well with far larger competitors such as CNOOC (CEO) and PetroChina (PTR) which give the appearance of being public companies yet both are controlled by Beijing (China). Not to mention of course the 'supply side' state owned oil companies of oil producing countries where a number of them dwarf the collective muscle of all of the above.
The bottom line is that there is fierce global competition for resources. Instead of awarding a Congressional medal of honor to XOM, CVX and COP for holding their own in the battlefield, Senator Obama and others want to shoot our own soldiers in the back!
Success and Efficiency
Yes, the numbers are big and they will get even bigger. This is the nature of progress but this is not how you measure success and efficiency. For efficiency, use the net profit margin to see if there is enough competition. If the margin is way above norm, then there is inefficiency. If the number is too low, then our boys may need Washington's help to compete in the so called free market out there. At 10% to 13% net, our boys deserve a medal for holding their own.
On the success front, we are experiencing mixed results. Measured by the number of years of reserves that each company has, COP is barely holding its own taking into account the Venezuelan loss. CVX and XOM have seen better years. Reserve replacement is not keeping pace. Though there are several prospects on the horizon, we need to continue working with proven reserve figures and not change the method of calculation.
Houston, We Have a Problem
If you want to talk about hideous obscene profits and profit margins, then look no farther than Transocean (RIG). RIG just reported a whopping net double YOY (see earnings call transcript). Again, it's not the big number that matters! Though the net is over $1 billion it could be $10 billion and that would not be cause for concern. What does matter is that the $1B net earnings were achieved on $3.1B revenue. A net profit margin that exceeds 25% is astonishing for the drilling sector.
Pundits are likely to conclude that there is room here for a windfall tax and I would be inclined to agree. Obviously, there is not enough competition in the rig business. This is where Democrats and Republicans historically differ in opinion. The Republican approach is that the Government should stay out of free trade and let the market take its course. Eventually there will be more competition and margins will revert to the norm. Democrats will advocate that there is real danger of a monopoly type market evolving and intervention is needed. In order to assure that Joe six-pack doesn't get screwed at the pump a windfall tax should be imposed.
Having stated my political inclination, I trust that my Republican brethren will find the above fair and balanced. Normally I stick to analysis and don't write about politics, though at times the two are intertwined.
Hold the Horses
Without going into all the arguments whether or not windfall taxes work or exacerbate obscure market anomalies, a deeper understanding of the offshore drilling segment reveals that current margins are temporary at best.
Over the past five years there have been technological advances in offshore drilling, primarily related to underwater depth limitations. This has spurred a flurry of activity for a number of companies and countries. Too deep to be of use is now beginning to come online and is likely to continue over the next decade.
As with any new technological advancement, those that are at the forefront usually reap the benefits until the rest of the world catches up. In the drug industry, patents are used to assure a number of years of uninterrupted profits. In the military aerospace industry, secrecy and other measures insure years of continuous profits and supremacy. In the rig industry there are no such luxuries. Economy of scale is the only known method to ensure the foreseeable future.
Already, several competitors are appearing on the radar some backed by governments with deep pockets. India hasn't officially declared that it wants to be a major player in this segment as a stated State policy; however, both Chinese and Japanese companies are gaining traction. Transocean (RIG) is in the process of establishing itself as a world leader. Before we awaken to a new crude reality, let's not kill the horseman!
Disclosure: Numerous conflicts both long and short, pertains to personal, clients and associates, both direct and indirect. Example of indirect: long OMNI.
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This article has 55 comments:
User239762...you speak badly of the Annointed One...you must be a racist!! Ha Ha...tongue planted firmly in cheek.
- Transocean (RIG): 42.77B
- Diamond Offshore Drilling (DO): 16.64B
- Noble (NE): 13.53B
- Nabors (NBR): 9.64B
- Pride International (PDE): 6.64B
- Helmerich Payne (HP): 5.96B
- Patterson-UTI Energy: 4.15B
- Atwater Oceanics (ATW): 2.84B
- Hercules Offshore (HERO): 2.02B
- Grey Wolf (GW): 1.52B
Source: Yahoo! Finance
Yes, RIG might be the largest of the offshore drillers, but saying that they have no competition is downright idiotic. Your argument is almost equivalent to the argument that Exxon has no competition, because it is the largest integrated oil company in the space. You need to be defenestrated from Seeking Alpha for such moronic comments.
As a Democrat, I do have problems with Obama's windfall tax idea. The problem is that big oil is labeled as some huge, inhuman machine that somehow is against society in general. It's not. It's you, me, and half of America via their IRA's and pensions. When big oil makes a ton of money, everyone that had the sense to put XOM, COP or the like in their portfolio makes money. And there are years when they aren't making huge profits. By my calculations, Obama's $1000 "energy credit" would cost upwards of $100 billion. That's 1/4 of all of XOM's revenue and more than half of their gross profit. All it amounts to is a tax on the investors in these companies.
One of the roles of government is to re-distribute wealth. If you don't believe that, then look at the progressive tax codes. The more you make, the higher % you pay. That's not a Democratic idea. That has evolved from all of the prior Democratic and Republican politicians since the 40's. The problem is that this $1000 energy credit is just pandering to the masses. We're taking money from the "rich guys" and giving it to the "working Joe's". That's all fine and dandy to some extent, but this won't help the economy nor will it help us long-term in weaning ourselves from foreign oil. As a Democrat, I agree with Norman Lepoff that taxing success is ludicrous. I personally believe the income tax should be scrapped in favor of consumption taxes. We need to increase the incentive to work hard and save. However, I wouldn't hold my breath for anything like that in the near future from either party. Ross Perot and Steve Forbes proposed just such a thing and they were marginal candidates only --- and we all know that even if elected they'd be stone-walled by BOTH parties in Congress.
Without overhauling the entire system, which I think most people realistically don't expect to happen, the logical choice is to increase taxes somewhere to subsidize industry that will wean us off foreign oil. We don't have enough domestic oil to do it, so that means replacing oil with something else: natural gas, solar, nuclear, wind, bio-fuel, clean coal (if ever economically feasible), all of the above and then some. It won't be one thing. But if you're going to put a windfall tax on big oil, don't just squander it with a rebate that won't do anything for the economy long-term (just like W's stimulus plan). It's not worth it to raise GDP by one-tenth of a percentage point. We've got a huge federal deficit, huge debt load, and a war that's costing us more than the federal budget. And an economy that's addicted to oil worse than a junkie to heroin.
Read the article again. No one is saying that XOM or RIG have no competition. The argument is that whereas there is seemingly efficient competition for XOM - based on margins, at first look it seems that there is lack of efficiency in the rig sector.
The conclusion is that this is an aberration brought on by new deep water fields requiring new technology etc.
Dare I say that if you can't follow a trend of thought for a few paragraphs perhaps it would be wise to leave investment advice to others! All in good spirits!
As an aside, I'm not sure that readers realize that the picture is of the Four Horsemen of the Apocalypse as described in the Christian Bible. In essence this is meant to reflect my ambivalence regarding RIG. On the one hand I say let them be as they fight our battle, but do so with a watchful eye on conquest, war, famine and death. You must admit it is truly amazing how oil can embody all four. No offense intended towards anyone; being that I'm not Christian, I wasn't certain if an elaborate comparison/ parallel would be considered offensive…so I'll leave it to the readers to fill in the blanks. The link to the Metallica lyrics "The Four Horsemen" pretty much hit the nail on the head.
There are 4.5 million royalty owners receiving about 13% of about 4 million barrels daily produced from wells where individuals own the mineral rights.
Do the math and the average royalty owner gets a small check each month.
Obama likes to pontificate that he will impose a Windfall Profits Tax upon “BIG OIL COMPANIES”. However, for those of us who worked in the oil industry during the Carter years know first hand the royalty owners also had their royalty checks dramatically reduced by WPT.
It seems to me the message needs to get out that it is not only the oil companies whose profit will be confiscated under an Obama WPT scheme, but also the profits going to millions of royalty owners.
Furthermore, as we know the Oil Producing States collect production, severance, and extraction taxes on the gross value of the oil produced. Under WPT the Oil Producing State’s oil taxes will be reduced.
Now you say you won't vote for McCain...that basically says you will vote for the Chose/Annointed One. either directly or indirectly. So I guess you approve of a massive increase in spending, even beyond what's happened during GW's watch? His new medical plan; his other give aways. And guess what, he won't be pulling the plug on Iraq...that money will continue to go there one way or another.
Look for an even greater share of your money going to the governtment to use on a highly ineffecient set of programs. Congrat's. If you don't mind that then why not just write a big extra check to the gov't on your own. Donate.
But speaking strictly economics, the war in Iraq is costing us more than any tax hike could. We have bled billions of dollars there for 5 years. Do I think Obama will pull us out? Yes! I honestly do. The Democratic party is sick and tired of this war and have had enough. We are pissed off at the current Dem Congress for not pushing the issue (Pelosi and Reid). The Dem base wants us out, and the leadership has shied away from it because they haven't had enough to block a filibuster in the Senate. Many say they should have still tried. McCain has promised to stay the course in Iraq. I equate McCain with a third term for Bush. Pure and simple. This economic issue far overshadows any other domestic economy or social issue in my mind. Even being a life-long Democrat, if McCain was the one saying we'd pull out and Obama the one saying we'd stay, I'd be voting for McCain. I'd vote for Ron Paul in a heartbeat if he were the Republican nominee, because he's so vocal about the stupidity of this war and maintaining it that I'm 100% sure he'd pull out and quick.
Umm, yeah - You're right. The two party system is a total failure. Its infuriating to watch people vote down party lines without thinking about the actual issue at hand.
On the whole, I think changes in power from one side to the other are best. I wouldn't want either party to be able to have full control for too long. If for nothing else, a balance of the appointment of judges needs to be kept.
Now what doesn't help is having someone in charge that is only looking out for his half, and that can apply to both sides of the aisle. George W put his unchecked political cronies in place and we've seen the fallout ever since, from Rumsfeld to Cheney, to "Good Job" Brownie to that HR chick that was just testifying before Congress about asking all the stupid conservative questions during DOJ interviews. Remember that Bush ran as a "uniter, not a divider". Yet he has continued a trend of virulently dividing this country and its politics. And all these fringe groups --- right and left --- and all the hard-core obviously-biased political pundits don't help get things done. They just fuel the flames. And its all the people in the middle that get screwed. I can't stand Sean Hannity, but who the hell is that Combs guy? He doesn't represent me as a Democrat. And what grave did they dig him up from? He's a stereotypical "liberal" to cater to their largely reactionary audience. My guess is most typical Republicans don't like half of what Hannity says. And I requested removal from MoveOn.org. I used to support them, but they have moved so far to the left that it turns my stomach to be affiliated with them. Whether you agree with the war or not, calling a General a traitor because he's doing his job is pathetic.
If you go through all the comments from all the people on this blog, what you consistently see is a bunch of people --- Dems, Reps and otherwise --- screaming that our politicians aren't listening, and that this country is on a crash course to disaster as far as energy is concerned. I hope Obama and McCain are reading this, but they're likely not. Maybe some staffer is and will relay the message: STOP THE CRAP AND GIVE US A REAL, WORKING ENERGY POLICY THAT WILL INCORPORATE ALL REALISTIC OPTIONS AVAILABLE AND MOVE THIS COUNTRY TOWARD ENERGY INDEPENDENCE!
PS: Sorry for the obsessive posts today. I usually have a self-imposed limit of no more than 2 posts on any given article, but it's been a good conversation with y'all.
In case you did not already realize it, George Bush is not running for President.
Can we focus our comments on McCain's energy policy vs Obama's energy policy?
In the meantime I hope for the sake of my retirement account, that if the windfall tax materializes, RIG will move their headquarters from Houston to the tax heavens of the Caymans in a heartbeat, where they already have an office.
Sometimes it is better to be happy with what you got and not getting greedy. That freaking little former city organizer that promotes the wind fall tax on oil companies must be out of his mind.
taxing co.s that provide necessary goods and services food, shelter, energy, health etc is only right, within limits
they get more than enough $$ from us as it is
> jack
"Redistribution of wealth is a role of government." I agree, if you are talking about a Socialist government. I have heard law professors expounding that theory. Their education was at Berzerkley, so it's not suprising that would be their opinion. However, I don't recall the "Redistribution Clause" being in the U.S. Constitution. It is, however, in the Communist Manifesto. Is that the government you are referring to?
Put a little weight on the guy, teach him spanish and he's a dead ringer for Hugo Chavez!
The only "Change" we need is to remove the Democrats from power once more so we can STOP adopting the myriad laws, regulations and resulting lawsuits they and their Socialist friends just love, which are CHOKING the manufacturing and mining sectors of our economy. Then maybe we can get back to living normal, productive lives once more, instead of having to waste so much time concerning ourselves with their childish nonsense.
Not only one of the best posts of the year, but you are surely in the running for title of the year with, "Houston to Obama!"
Thanks for the time and effort on our behalf, my friend.
WTH gives you the right to judge who's property gets confiscated, the right to arbitrarily concoct a formula based on your personal whim, and the authority to discern it's relative morality?
We know why the odd couple of Hillary & Obama (for clarity purposes, we'll just refer to them as "HO") want to confiscate money from the shareholders of energy companies and gift it to people who didn't earn it --> HO wants to buy voters with other people's money.
This isn't anything new, and if HO can get away with it now, HO's tentacles will pillage any company, anytime, for no other reason than the company these shareholders invested their hard earned after tax dollars survived the competition, the military attacks on equipement and personel such as those ongoing in Nigeria & the ME, and the childish whims and pandering of Democrat Socialists in Congress.
Were you to be put in charge of deciding which shareholders to attack, who would be the next 1,000 or so companies would you deem meets your criteria to pillage after RIM?
If HO is going to send a gift wrapped $1,000 to every middle class & below resident paid for by a shareholder, you're going to have to extend this out WAY past the oil industry.
For instance, Chevron (CVX), of which both my son and I are investors in, only has 215,000 shareholders. They had a relatively good 2nd quarter, even if they are down 15% since the talk of confiscating - or in the words of Maxine Waters - "Socialising, Nationalizing" gained steam. If you confiscate 1 HO present from each shareholder, that's going to be a drop in the bucket!<p>
Why, for HO to be successful, you'd need 1,000 compaines the size of Chevron, and there's only 3 in the US that are larger - what are you going to do? What ARE you going to do?
Just do me a favor, Saul. When you and HO decide how many vote buying HO gifts my son and I are going to have to pay for, can you at least send me a little picture of where my HO gifts went, what country they're from, and which HO member campaigns they donated my HO gift to?
Thank you.
Can someone please take the time and explain to forwodenboats my article. Apparently my writing skills are inadequate.
1) No one is picking 'a company'. The Dem/Republican argument was stated fair and balanced, Dem's being: monopoly intervention etc.
2) High net margins are a symptom calling for further diagnosis.
3) Article concludes that though it may smell like a monopoly, RIG is not a true monopoly, more in line with the drug industry...new technology etc.
4) RIG needs to establish itself before we "wake up to a new crude reality" as in 'supply side' state owned competitors that will change RIG's landscape (or is that oceanscape!).
Perhaps if someone could summarize the article in a few sentences using your own words, perhaps forwoodenboats and others will understand why I say we need to keep a watchful eye on RIG, but by no means kill it!
It appears to me that some readers are accustomed to reading articles that present a single side of an argument and are lost when both sides are presented in an abbreviated fashion. To complicate matters, I tend not to delve into secondary outcomes and stick to the primary basis of the logic on each side. Not to say that I can't do it, but who wants to read a ten page article? I don't!
Thanks,
Saul
"Pundits are likely to conclude that there is room here for a windfall tax and I would be inclined to agree. Obviously, there is not enough competition in the rig business."
By your OWN words, you clearly buy the "windfall profits tax" scam, AND state a sample of the criteria by which this confiscation would be found agreeable.
There's nothing opaque with your writing, you're just in the wrong country is all. You should be writing for Pravda, or some other government nationalized rag.
Thank you for clarifying your first comment with the last. There seems to be a disconnect between the meaning of capitalism and state run communism.
Monopolies are the mantra of communism. Free competition is the norm for capitalism. A windfall profits tax is not a dirty word in capitalism IF and WHEN used correctly and for the purpose that capitalism intended it for.
Whenever competition is stifled, this occurring for any number of reasons, inevitably the first symptom is obscene profit margins. Not all abnormal net margins dictate an underlying monopolistic structure, as most are not. However, it needs to be scrutinized.
There are several ways to 'break up' a monopoly so that we DON'T become a communist style economy. One of them is applying a windfall profits tax to the monopoly and assisting the future competition either directly with the proceeds or through indirect methods.
Throughout the entire article, including the quote in your second comment, the analysis is linked to COMPETITION, as in - no monopoly.
You would be correct had you said that this is NOT what you have been hearing from Senator Obama. My opening paragraph spells this out. The fact that I am being polite and not calling Senator Obama all sorts of names does not detract from the essence of the article where I clearly explain what a 'kosher' application of the windfall tax would be TO PROTECT CAPITALISM.
Also, note that I have intentionally not gone into the argument whether or not windfall tax methods actually work as compared to a break-up when necessary.
The bottom line is that just like XOM, CVX and COP are not even close to being monopolies, RIG when looked at on a global basis is far from one as well. There is no reason to intervene regardless of method as they do NOT pose a threat to CAPITALISM.
As an aside, there is no concept of 'windfall taxes' in a communist or totalitarian regime. The monopoly is owned by the state or party. Think about it.
Saul
See: online.wsj.com/article...
The American public needs to be educated about this and understand the difference between 'excise tax', 'excess profit tax', ('windfall tax' - non U.S. term - which is the Government giving back!) and 'windfall profit tax'. The term 'windfall profit tax' has been misused many times.
The Carter (1980) "windfall profit tax" as it was called was NOT a windfall profit tax at all! It was an excise tax. Today people are confusing this with 'excess profit tax'. In other words, Senator Obama is using the term incorrectly when talking about a 'windfall profits tax' when he really means to say an 'excess profits tax'. The latter is reserved for wartime etc.
The context the term is being used in by Hillary, Obama, and the vast majority of the Democrat party is one of confiscation of capital and of nationalization of refineries.
This is exactly what Communist leaders like Hugo Chavez and totalitarian dictators such as Saddam Hussein have done. I don't know if Castro had an oil well or refinery, but he "freed" his people of their possesions as soon as he had the political power to do so.
If you want to take the time to give a dissertation on the semantics of the name these politicians have affixed to confiscating personal property, have at it.
You say "Windfall profit tax" is an incorrect term, yet it is the one you used, and in the same context as the one the D candidates and both D sides of their respective houses of congress are using to demonize American companies, affix the blame for the current crisis on these companies when it is and was clearly the fault of the democrat leadership that caused this shortage, then add insult to injury by trying to raise political capital from this heinous deceit by confiscating American Investor held funds, and redistribute them as political gifts to potential voters in the heat of a presidential election.
Can you not see where arbitrarily suggesting that one oil industry company might be ripe for a windfall profit tax in the heated environment caused by these 2 pandering candidates and thier majority collegues might result in a clubbing?
BTW, please quote your source for "excess profit tax being reserved for wartime, etc."
Short reply re:source now, the rest later.
Source:
1) en.wikipedia.org/wiki/...
2) www.answers.com/topic/...
3) financial-dictionary.t...
4) www.britannica.com/EBc...
"a tax levied on profits in excess of a stipulated standard of “normal” income. There are two principles governing the determination of excess profits. One, known as the war-profits principle, is designed to recapture wartime increases in income over normal peacetime profits of the taxpayer. The other, identified as the high-profits principle, is based on income in excess of some statutory rate of return on invested capital."
It appears there was, during times of war - 1st enacted in 1863 by the Confederate Army (Slave Owning Southern Democrats, what a surprise!) - and the government later experimented with taxing companies who were either profiteering off the war(s) or at other times when an entity was making in excess of a set standard, neither of which are relevant in this case.
The government has not set a standard for excess profits, so they have no standing to use that as a reason. Indeed, there are many companies and individuals which operate on a much higher margin - look at the gain in income percentage for the Obamas and Clintons lately - Both O and Ms O had their income increase over 100% in one year, Mr. C suddenly made 20 million for God knows what in Dubai, and where in the world did Ms C pop up with 5 million to lend her campaign on her salary?
In short, the Excess Profit Tax did not set a precedent for attacking one industry whilst leaving other, more profitable industries alone when it was in effect (AFAIK), and there is no EPT in this country at this time.
I look forward to the rest of your answers - especially if you care to address the obvious market manipulation factors.
Whether this market manipulation is strictly for political power plays, fame or for fortune could be considered irrelevant, as it is without a doubt intended to interfere with and harm the oil companies, and the American Citizens (and maybe even some Citizens of the World) who own them.
Sorry for the delay...was a bit busy.
In your second to last comment you raise the issue that I used the term 'windfall profits tax' instead of 'excess profit tax'. In your last comment, you correctly mention that 'excess profit tax' is related to an occurrence such as war and all those that benefited (beyond the norm) from the occurrence.
Yes, this is what the article is about as well. Some Democrats are mixing the two terms together, while pitching to the public the term 'windfall profits tax'. My article allures to the correct usage and spells out clearly the yardstick used to determine if there are windfall profits or not.
What is interesting is that 'excess profits' is not measured by net margins, rather by total gross profit (the big number syndrome) in relation to the peacetime period directly preceding the war. Again, I hear Senator Obama constantly talking about 'windfall profits' and then giving an 'excess profits' explanation.
There are two different avenues that are taken in the process of passing either windfall or excess. Mixing the two together may be more popular with the public but is very misleading.
First, with windfall, you can not redistribute the tax to the general public. The tax is justified in the first place because of lack of efficiency and to create competition. I won't go as far as calling it a hoax, but if the next president were to tie the two together, meaning a windfall tax and a redistribution to tax payers, this could be grounds for impeachment and I'm not kidding. Obviously this couldn't happen as it would be stopped in Congress.
Second, the fact that there is a redistribution call connected to the 'tax' is proof on its own that the 'tax' is excess. That would be legal. The only fly in the ointment is how to legally impose an excess tax only on the companies that you want to 'hit' without 'hitting' everyone?
'Windfall' is company specific whereas 'excess' is event related.
As for the 'excess' logic in the first place, I'm not going to rehash here the old Dem-Republican arguments for and against. Be it suffice to say that we will always disagree on the principle, but only when a true scenario exists. Being that this is NOT the case today, de-facto we are in agreement.
As an aside, this whole episode could very well be a message to big oil not to back the Republican candidate too strongly using the 'windfall' 'company specific' message!
Oh politics...what an evil web we weave!
Thanks
The guy smoke two packs a day and has a He-she bitch of a wife.
I really can't stand McCain however I will be voting for him in 08.
Why? Because Obama has really issues. That's why he hung out at that racist church. He was looking for a daddy and a mommy.