Monthly Archives: January 2008

In praise of Exxon

With Exxon reporting record profits, count me as one of the few that thinks this is a good thing.  If you have a 401k, chances are you own shares of Exxon’s stock and have benefited.  The company’s largest shareholders are companies like Barclays, Vanguard and Fidelity that manage mutual funds owned by you and me.  Last year alone, Exxon returned $35.6 billion to investors.  If you wrote that as a check to each of the 113 million household in the U.S. it would be $314–talk about a real economic stimulus package!  Meanwhile our government is causing rampant inflation, with its funny money backed stimulus package.  Blame our government, not Exxon, for higher gas prices.  For those paying with U.S. Dollars, oil has quadrupled in price over the past four years.  Four years ago an ounce of gold would buy you roughly 12 barrels of oil; an ounce today would get you roughly 10.

Some observations worth pointing out and concretizing:

  • Exxon reported net income of $40.6 billion over the past year.  In the past year alone, they have grown profits by $900 million.  To put just the $900 million of income growth in perspective, that’s the entire profit from a company like Safeway that operates more than 1,700 stores and works all year to make that much.
  • Over the past 5 years, the company has more than doubled its overall value (i.e. market capitalization), creating over $200 billion in value to investors.  Discounting PetroChina, which is a nationalized company, Exxon is the most valuable company in the world.
  • The company produces on average 6.5 million barrels of oil daily.  After refining, this is enough gas to fuel the average daily driving of some 63 million people.
  • 5 years ago, the company was already one of the world’s largest.  In the past 5 years, they have managed to take an incredibly large company and double its revenue.  During the same time, profits have quadrupled.  Words alone could not convey how difficult it is to take a mega cap business like this and grow it.  General Electric, another mega cap, has tried and grown revenues just 25% and income 56%–fantastic numbers, but pale in comparison.
  • Exxon is also fantastically efficient, employing 106,100 people.  This sounds like a lot, but let’s put that in perspective.  McDonalds employs more than 4 times as many people, yet has less than a 10th the profit to show for it.  Comparing inside the petroleum refining industry, it operates at a higher profit margin than most of its competitors–including BP, Chevron, Conoco, and Shell.  Average revenue per employee is a staggering $3.8 million.  Again to put this in perspective, Google–now famous for hiring geniuses–harnesses just 25% as much revenue from each employee.

There is an excellent speech by their CEO, Rex Tillerson, from a few years ago that crystallizes how their business works and the role they play in the industry.  Some of my favorite quotes:

  • “By the year 2030 – less than twenty-five years from now – the world’s energy needs will be almost 50 percent greater than they were last year, driven mostly by growth in developing countries.”
  • “Such growing demand for energy reflects a growing demand worldwide for escaping poverty, attaining higher standards of living and achieving greater prosperity. Energy use correlates directly with economic development, and in the hierarchy of human needs, energy ranks high.”
  • “So the real question is not whether we will soon reach peak oil, but whether we can reach peak performance in the responsible production and use of oil and other fossil fuels.”
  • “Every day, consumers around the globe use 230 million barrels of energy, measured in terms of ‘oil equivalent’, from all sources. Oil alone is consumed at a rate of 40,000 gallons a second. Put another way, in the time it takes me to deliver these remarks, people worldwide will have used over 50 million gallons of oil.”
  • “About 55 percent of U.S. oil supplies originate in North America. No other region – including the Middle East – meets more than 15 percent of U.S. oil needs. It may surprise some to learn that the United States imports more oil from Mexico than we do Saudi Arabia.”
  • “Federal and state governments in this country have ruled off-limits an estimated 31 billion barrels of recoverable oil and 105 trillion cubic feet of natural gas. And the majority of those amounts are not found in the Arctic National Wildlife Refuge. They are found in the Rockies and off many of the coasts of the continental United States.”

Most profitable businesses to start

Forbes has publised a list of the most and least profitable business to start.

“Of the winners, little surprise that professional services–accounting, law, design and medical-related firms–accounted for eight of the top 10. Two big perks here: constant demand (no matter what the economy is doing, people will still get sick and still sue each other) and relatively low overhead. Bean counters trumped all, with a 25% average pretax margin. Next came the legal-service firms, at 21.6%, followed by dental offices (20.9%) and specialty design shops (17.6%).

Looking for causes behind low and high profits, the unstated concept of moat comes up:

Another nice thing about professional services is all the repeat customers. “If someone’s been doing my taxes for 20 years, why would I switch?” says John Czepiel, professor of marketing at New York University’s Stern School of Business. “There’s a perceived cost of switching that keeps customers coming back.”

As for those bleeding red ink, the reasons are myriad. Low barriers to entry, huge fixed and variable costs, lack of product differentiation, and little or no pricing power with buyers and suppliers are but a few.

The most interesting to me: Specialized Design Services (e.g. interior designers, industrial designers, graphic designers).  As far as the rest, I was surprised to see banking, accounting and medical care so heavily represented.  I don’t think of them as being high margin things.  I think it would be interesting to see someon take one of the less profitable ones, especially Amusement and Recreation Services (e.g. golf clubs, ski resorts, marinas, fitness centers and bowling alleys) and make it profitable.  The people I meet day-to-day are craving something fun and unique to do.  I imagine part of the difficulty there is creating something high value, but also having a margin left over.  People have high expectations when it comes to entertainment, and are none the less very frugle.