Shortly after submitting my previous article on the vilification of the word “profit,” and even more so when related to oil, the headline “UN Head Calls for Taxing ‘Grotesquely Greedy’ Oil” appeared in a newsletter I read, with the following quote: “UN Secretary General Antonio Guterres called on governments globally to tax these excessive profits and redistribute them, saying oil companies have been making immoral profits on the backs of the poorest people.”
Similar sentiments have been expressed by the U.S. president and appear in other editorial commentary.
While infuriating, the article also reinforced my musings in the previous column. Rather than rant, I wanted to gather facts for illustration, and I selected a sampling of four Canadian exploration and production (E&P) companies that focus on upstream production, along with four large integrated companies, one American, one British and two Canadian, and all names that I own. The four E&P companies were selected from a list of Canada’s largest.
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I then selected four large technology companies for profitability comparative purposes.
The E&P companies are Cenovus (CVE), which has now transformed into an integrated company with the purchase of Husky, Arc Energy (ARX), Batex Energy (BTE) and Crescent Point (CPG). The integrated companies are Exxon (XOM), Shell PLC (SHEL), Imperial Oil (IMO) and Suncor (SU). The technology companies are Microsoft (MSFT), Apple (APPL), Alphabet, owner of Google (GOOGL), and META Platforms, owner of Facebook (META). For disclosure purposes, I also own shares in MSFT and GOOGL, and have sold puts on META. The examples, I believe, are reflective of industry realities.
The profit metrics selected for Table 1 are commonly used. The definitions of those profit metrics are as follows:
- Trailing 12 months (TTM): July 1, 2021, to June 30, 2022.
- 2013-22: Average annual results for a complete decade, which is a necessary length of time because of the cyclical nature of energy. It includes two years of the previous high-price cycle, the tough years after the 2014-15 price declines, an excellent pre-COVID recovery, the devastating COVID era and the recent year of “grotesque greed.” Because 2022 is not complete, I used trailing 12 months for 2022, which, I believe, is a fair approximation now that oil prices have declined.
- Return on equity (ROE): Profit/book (equity) or value of the company.
- Return on assets (ROA): Profit/total assets employed by the company, which includes equity plus debt.
- Free cash flow per share (FCF/Sh): This is what shareholders really get for themselves. It is cash flow minus capital expenditures.
- Share price: The price per share a decade ago and at the time I put the chart together in mid-August.
E&P companies on average lost money over the decade as indicated by the negative ROE and ROA. The greedy buggers paid for the privilege of providing consumers energy! There was, however, a small amount of free cash flow as asset value write-downs, which occurred over the decade and affect profit but not cash flow. The share price declines reflect losses to shareholders of more than 60 per cent.
Integrated companies, which participate in all aspects from upstream to refining and retail, were more stable and performed better. However, over the decade, they still exhibited poor profitability with average ROE and ROA of just 8.3 and 4.1 per cent, respectively. As an investor, those are unacceptable return rates, but to the head of the UN they are “immoral profits.” Share prices reflect poor profitability and are, on average, the same as a decade ago. Dividends are not included here and in many cases are lower than a decade ago.
The tech companies were four times more profitable than the integrated oil companies as reflected by four times the ROE and ROA. They were infinitely more profitable than the E&Ps that lost money. Their dramatic share price growth reflects their growth in profitability.
Even comparing the past year of oil company “grotesque greed,” tech company profitability remains approximately two times that of oil companies as reflected in the ROEs and ROAs. The E&Ps are now more profitable than the integrated companies, which is normal during higher-price environments. It will, however, take numerous years at current energy price levels to make up for past losses, and I find statements like the above grotesquely misinformed and misleading.
Plus, the statement implies oil companies set the price but like farmers they are price takers not price makers. They effectively accept the market price offered in an open auction system. They can hedge and those with retail operations have some control on the retail side, but that is a competitive space where drivers cross the city for a few cents a litre.
Other misleading statements frequently appearing go something like, “Oil company profitability quadrupled over the past year,” or “Oil company X raked in $4 billion in profits.” With respect to the first statement, keep in mind an important mathematical equation — two times nothing is still nothing! A low baseline can lead to high growth percentages. The second statement implies excess profits but without knowing the size of the corporation says nothing. If it took $400 billion in assets to earn $4 billion, the one per cent ROA is pathetic profitability (but I guess it’s better than the E&Ps over the past decade).
Given the dynamics and lack of profitability, why would anyone invest in energy? Doing this exercise made me question my own sanity with energy investments and is a question I will explore in the future.
