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Exxon’s Profits and the Lack of Renewable Investment

July 31, 2008 10:18 AM

ABC News’s Bianna Golodryga reports: As the rest of the nation's economy grapples with record oil and gas prices, deep in the heart of Texas, things look pretty good -- and Texans can thank ExxonMobil for that. This morning, the world's largest oil company reported revenues of $138 billion for the second quarter of 2008. Believe it or not, the record profits of $11.6 billion, or $2.27 a share, were smaller than the $2.52 a share Wall Street had expected. Still, the company's profit topped its previous record of $10.9 billion during the first three months of the year.

For big oil, 2008 has been a very good year. How good? Well, it's even better than last year, when the combined sales of the top five oil companies added up to $1.5 trillion -- that's greater than the GDP of Canada.

Since then, the price of crude has soared by as much as 50 percent while the price of natural gas has also taken off. And though oil has had a significant drop from its high of above $140 a barrel for the second quarter, the benefits of high oil are clearly noted in balance sheets of the world's largest oil companies.

Exxon's earnings come on the heels of stellar earnings from ConocoPhillips, which reported a $5.4 billion net income for the quarter; BP, which posted net profits of $9.47 billion for the quarter; and Shell, which reported $11.6 billion earlier this morning.

Those kind of figures have sparked calls for alternatives to foreign oil now more than ever.

The calls for change are coming from big players from former oilmen like T. Boone Pickens to the oil companies themselves, which have invested in a media blitz highlighting their support for alternative energy sources.

But are they putting their money where their mouth is?

We crunched the numbers with Bernie Picchi, oil analyst at Wall Street Access, who said "They are probably spending more on their advertising than the actual research itself."

To be fair, Exxon has publicly said that it is not in the renewable energy business, but rather focused on oil and gas. So it should be no surprise that out of the five largest oil companies, Exxon spent just 1 percent of its $41 billion in profits last year on alternative energy sources.

But none of the others fared much better.

For its part, Shell also invested just 1 percent of its $32 billion in profits last year on alternative energy exploration.

While both Chevron and ConocoPhilips invested only 1.3 percent of their profits on research, the company that invested the most in alternatives -- BP -- after profiting $21 billion, just $600 million or 2.9 percent was spent on research.

All in all, between the five companies, $2 billion was set aside for alternative energy research.

Picchi goes thru the numbers.

"This is the largest industry in the world with the exclusion of the financial service industry. It’s a very large amount of money. The after-tax earnings of these companies was around $125 billion. You get the idea that $2 billion, although an enormous amount of money to you and me, is truly just several drops in the bucket for the industry."

But don’t let the numbers fool you: all is not so great for big oil either. Contrary to popular belief, Exxon is also feeling the heat of record high oil prices. The company, which only produces 3 percent of the world's oil, doesn't produce enough to meet its own refining demands. And because of that, it too has to shell out big dough to pay for crude at present-day prices.

And as the run-up in gas prices at the pump has led to a decline in demand for gas the past few months, Exxon and the rest of the industry are facing an uphill battle to raise wholesale and retail prices fast enough to break even with record oil prices and refining costs.

Which leads to the bigger question: why is oil so expensive today? Supply/demand, manipulation, or policy?
According to one of the country's most prominent oil analysts, Oppenheimer's Fadel Gheit, the later two explanations are the main factors. According to a new book “The Oil Card” by Jim Norman, by allowing financial players to dominate oil trading without regulations while keeping margin requirement at a low of 5 percent, compared with 50 percent on stocks, the U.S. government is engineering the rise in oil prices to slow down China's economic growth, which is the most formidable global challenge, not Iran, or terrorism. It is modern economic warfare.

In fact, many industry experts are expecting the sharp increase in demand for oil from China to decline after the Olympics. China, like other emerging markets, subsidizes its oil, thus making it more affordable for citizens to buy gas. And with an estimated 1,000 new drivers hitting the road in China every day, one can imagine how much money China's government shells out for subsidies. As global economic growth slows, many don't expect China will be able to support those subsidies for long.

Gheit also believes that the current price of oil is just not sustainable for the long term. “Oil companies are making record profits because of the inflated oil and gas prices, which I believe are not supported by market fundamentals. After all there are no shortages despite all predictions of potential disruptions, which have not materialized. The oil markets are rigged since government actions, or inaction, affect supply and demand. Access to resources, taxes, subsidies, product specifications, and other regulation allow other participants to push oil price up or down.”

As for exploration in alternative energy sources, politicians have been hammering Exxon for what they say is too much emphasis on stock buyback policies, but Exxon and industry experts note that the company's main obligation is to it's shareholders, many of which are large pension and mutual funds.

Picchi adds that the oil companies "Have a responsibility to the owners to split the balance between growth and profitability. And growth without profits its a hard bargain for the owners of the company. What they have really done is respond to the owners requirement for the best possible return on their investment as owners."

Common belief within the industry is that oil companies won't have incentive to change their policies until Washington changes its policies. "In fairness to the industry, there really is no policy right now in the U.S. or for that matter Western Europe that would really help the companies to direct them to spend their money in these non-carbon fuels," Picchi goes on to say.

As for current solutions coming out of Washington, most oil experts believe it would take many years before any substantial relief from ANWAR drilling (which presidential hopeful John McCain supports) would be felt, while a windfall profits tax (supported by Senator Obama) would be more of a hindrance to further exploration and research than it would be a solution to the problem. Exxon claims that it is spending more of its capital on exploration, and notes that its tax rate has gone up from 44 percent to 49 percent.

Make no mistake about it, oil companies are gushing in dough. But when you look that their profit margins, they are actually lower than Microsoft’s, Google’s or IBM. And no one is suggesting a windfall tax for them.

So what does Picchi see as legitimate criticism for big oil? "Think a fair criticism is this industry has not been spending enough over the years on exploration an production. Total cash flow, only about half of it is going into traditional capital spending and roughly another 20 percent or so is going into share repurchases, the rest in dividends to the owners of the companies”
Politicians have been hammering Exxon for what they say is too much emphasis on stock buyback policies, but Exxon and industry experts note that the company's main obligation is to its shareholders, many of which are large pension and mutual funds a wide spectrum of Americans depend on.

And so the debate continues...

July 31, 2008 | Permalink | User Comments (45) | TrackBack (0)

The Drippy Days of Starbucks

July 30, 2008 5:22 PM

ABC News' Charles Herman reports: Like the drip-drip-drip of a coffee percolator, such are the days of Starbucks.

The world’s largest coffee chain that has millions of Americans addicted to its various liquid concoctions has been brewing up a lot of bad news recently.

Drip. Starbucks says goodbye to breakfast sandwiches.

Drip. Starbucks announces it will close 600 stores across the country and say goodbye to a reported 12,000 baristas.

Drip. Starbucks publishes the list of the stores to close. And despite the common complaint about too many Starbucks, coffee drinkers unite to save their Starbucks.

Drip. Starbucks saves the breakfast sandwiches.

Drip. Starbucks will cut 1,000 jobs, through a mix of layoffs and leaving unfilled positions open.

And today, drip, drip, drip. Starbucks reports a net loss from April to June of $6.7 million, compared with a gain of $158 million for the same period a year ago. The company cited continued slow traffic and declining sales in the U.S. as coffee drinkers cut back on thei r $3 lattes

But in large part, the loss was due to the costs of closing stores and restructuring the company.

Company CEO Howard Schultz has a rescue plan: focusing on what got the company percolating at the start years ago: coffee, coffee, coffee.

If only the daily drips could stop.

July 30, 2008 | Permalink | User Comments (40) | TrackBack (0)

A Housing Blue Light Special

July 29, 2008 1:12 PM

ABC News’s Bianna Golodryga reports: This morning's S&P/Case-Shiller Home Price Index, a widely watched gauge of U.S. home prices, reveals that prices continued to drop in May, erasing four years of gains. While continued declines in hard hit states like California, Nevada and Florida were expected, the latest report shows that the problem is nationwide. For the second straight month, every region in the country saw a drop in home prices from last year.

Eleven major cities, including San Diego, Miami, Orlando, Tampa, Las Vegas, Detroit, Los Angeles, Orange County, Phoenix, Sacramento and San Francisco, showed year-over-year declines of a record 16 percent or higher.

No doubt, with the number of U.S. home foreclosures skyrocketing over 120 percent within just the last year, the average price of those homes is following suit. But in the opposite direction.

While that's bad news for homeowners, for those looking to buy a home today, especially a foreclosed home, the timing could not be better.

We found bargain basement prices across the country. And they are falling at record speeds. According to Dr. Paul Bishop, research director at the National Association of Realtors, "One thing that is really unprecedented is the speed at which the prices have fallen in these markets. It hasn't been slow and painful, it has been quick and painful.”

Bishop goes on to say that “It really is a buyer’s market out there, there are roughly a dozen markets out of 110 we track where median prices are under $100,000 and another 17 or so markets where median prices are between $100,000 and $120,000."

A startling figure, given that the current national average price of a single family home is $215,000. So if the average home is losing value, what does that say about the value of a foreclosed home? The answer, we found, is pretty shocking.

In Cleveland, a 3-bedroom, 2-bath multi-level home that had an estimated value of $112,692 can be yours today for just under $40,000. In South Carolina, a brand-new, 2,000+ square-foot home sitting on an oversized lot was previously valued at $125,000. It's currently priced at $50,000. But why stop at $50,000? In Louisville, Ky., $28,000 will get you a 4-bedroom single-family home -- where the average list price is nearly $170,000.

But perhaps some of the best deals for home buyers today can be found in the Motor City. Detroit is home to a whopping 1,754 properties currently on the market for under $10,000.

A 3-bedroom bungalow with a 2-car garage is on the market for $6,500. New windows and kitchen cabinets included.

According to local Detroit realtor Carl Williams, "You can't beat the buys here. We're standing in front of a house that two years ago went for $90,000 to $120,000. Now it’s on sale for $6,900." That home is located in a middle-class neighborhood and experts say that when the market goes back up, so will the value.

So therein lies the $64,000 question. When will the housing market rebound? The answers vary from soon, to not so soon. But when even bearish investors suspect that there's only another 5 percent drop in home prices to go, one has to believe that there is a light at the end of this dark, deep and painful subprime tunnel after all. As for now, if you can stand the risk, and have the credit and cash, then investing in a foreclosed home has never been such a steal. As Bishop says, "While it is painful for sellers it is a good opportunity for buyers who are in the market to get a good deal."

July 29, 2008 | Permalink | User Comments (20) | TrackBack (0)

`Extreme Makeover’ Home: Foreclosed

July 29, 2008 10:52 AM

ABC News’ Scott Mayerowitz reports: A reality TV house just got a nasty dose of reality. One family’s Georgia home -- rebuilt as part of the popular ABC show “Extreme Makeover: Home Edition” -- is now one of the latest victims of the nation’s foreclosure crisis.

Back in January 2005, the TV show – along with Atlanta-based Beazer Homes USA -- demolished the Harper family’s decrepit old home and its faulty septic system. Construction crews and more than 1,800 volunteers then built a new four-bedroom house.

Beazer gave the family $100,000 in cash and paid off their mortgage.

It seemed like the perfect fairy tale TV ending.

But fast-forward three years, and the Harper family’s castle is about to go up for auction on the steps of the county courthouse.

Apparently the family used the home as collateral for a $450,000 loan which it now can’t repay.

Patricia Harper told ABC’s Atlanta affiliate, WSB-TV, that the money had been used for a construction business which was suffering.

The house is set to be auctioned on Aug. 5, but Harper told WSB that the family had reached a deal to save their home. The bank couldn’t comment on that.

ABC said in a statement that the show “advises each family to consult a financial planner after they receive their new home. Ultimately, financial matters are personal, and we work to respect the privacy of the families."

Lake City Mayor Willie Oswalt, who helped put a large beam into place in the family’s new living room, is upset about the possible foreclosure.

"It's aggravating," Oswalt told The Atlanta Journal-Constitution. "It just makes you mad. You do that much work, and they just squander it."

July 29, 2008 | Permalink | User Comments (210) | TrackBack (0)

Gas Prices Fall Below $4; First Time Since June

July 28, 2008 4:42 PM

ABC News’ Daniel Arnall reports: The Energy Department announced this afternoon that gas prices have fallen by 11 cents in the past week. The national average price for a gallon of regular unleaded is now $3.96. This is the first week since June 2 that has seen a national average below the $4 mark.

Even with the big drop, the price is still 38 percent higher than it was a year ago ($2.88).

Consumers in the Midwest saw an astounding 15 cent drop in the price of a gallon -- the biggest regional drop in this week’s survey.

American consumers are helping push prices lower by cutting back on their driving. The demand for motor gasoline has fallen by 2.4 percent, according to the latest weekly Petroleum Status Report from the Energy Department.

The falling demand for refined products was a key factor in the significant sell-off in crude oil futures two weeks ago. Today, the price of a barrel of crude settled up $1.47 to $124.73. That’s nowhere near the $147 peak that oil hit on Friday, July 11.

Analysts say increasing tensions between Iran and the West and continued violence in oil - exporting Nigeria helped buoy the price of oil today.

July 28, 2008 | Permalink | User Comments (10) | TrackBack (0)

Miles Driven in May Show Steep Decline, Transportation Dept. Says

July 28, 2008 10:21 AM

ABC News’ Kate Barrett reports: People drove almost 10 billion fewer miles in May 2008 than in May 2007, according to new numbers released this morning from the Department of Transportation.

The month of May usually brings a surge in vehicle traffic as summer kicks off and families celebrate Memorial Day. But not this year. May’s drop in traffic was the third-steepest monthly decline since record keeping began. (Travel in May 2008 was 254.7 billion miles, according to the Transportation Department. )

In fact, May has never seen such a drop off in miles driven. Often, large decreases in traffic come in December rather than at the start of the summer. Of all areas of the country, the data shows that people continue to drive most in the nation’s north central states.

While driving less may mean spending less money at the gas station, it also means fewer dollars are being pumped into the Highway Trust Fund.

Transportation Secretary Mary E. Peters said Monday that the data collected from the Federal Highway Administration provides evidence that the way in which America funds its infrastructure needs to shift. She said the government needs to look at funding highways and bridges in alternative, sustainable ways rather than relying on the gas tax.

Tell ABC News how you are dealing with high gas prices.

July 28, 2008 | Permalink | User Comments (17) | TrackBack (0)

Why Banks Don't Like Fridays

July 25, 2008 4:05 PM

ABC News' Charles Herman reports: TGIF? Not for a bank in trouble.

Friday is probably your most feared day for a bank struggling to stay in business.

The Federal Deposit Insurance Corporation, or FDIC, has a history of taking control of struggling banks on Friday evenings. Perhaps it allows the government agency time to review the bank’s books and make sure the doors can open for business on Monday, albeit under new ownership. It might also be the hope that people will be paying a little less attention to the news over the weekend.

Whatever the case, five times this year, the FDIC has assumed control of a bank. Five times, it has done so on a Friday:

Friday 1/25: Douglass National Bank, Kansas City, Mo.
Friday 3/7:  Hume Bank, Hume, Mo.
Friday 5/9: ANB Financial, Bentonville, Ark. 
Friday 5/30: First Integrity. Staples, Minn.
Friday 7/11: IndyMac, Pasadena, Calif.

So, if you were a bank officer struggling with huge losses and a surging number of defaulting loans, you might be a little bit worried today.

July 25, 2008 | Permalink | User Comments (10) | TrackBack (0)

If the Stock Market Were a Movie...

July 25, 2008 2:44 PM

ABC News’ Bianna Golodryga reports: If the stock market were a movie, it would look a lot like "Sybil." Sally Field's character had 13 personalities, and for the last 13 days, so has the market.

Triple-digit selloffs are followed by triple-digit rallies. Bad economic news one day is followed by not-so-bad news the next.

Just compare Thursday's action with today's. Thursday's nearly 300-point selloff was triggered by a report showing that existing home sales for June were at their lowest level in 10 years. Add to that news that U.S. foreclosures in the second quarter more than doubled compared with a year ago, and soared nearly 14 percent within just the last three months.

For investors, it was just another reminder that the housing market is nowhere near hitting bottom. Or is it?

Just hours later came word that the decline in sales of new homes in June was smaller than analysts' expectations.

As for that shaky consumer sentiment ...a report out this morning shows that it's not that bad. Durable goods orders were also better than expected. So what gives? Don’t worry about it, because the truth is, no one really knows.

But wait a minute, if that's the case, then maybe we should worry? (You see my point about Sybil?) Take financials, for example. After the Treasury's valiant attempt at resurrecting Fannie and Freddie combined with the sense that most large banks will not fail, financials came back from the dead with a vengeance.

Forty percent swings by a stock in one direction were immediately followed by 60 percent swings in the opposite direction. Better than expected reports out of Citi, JP Morgan and Wells Fargo all boosted confidence that maybe financials were finally making progress at cleaning out the skeletons in their subprime closets and were ready for a significant recovery.

All of the sudden, anyone who was short financials quickly reversed course. But that too, didn’t really work. Liquidity concerns about Wachovia and Washington Mutual, Merrill Lynch selling its stake in Bloomberg to raise capital and continued whispering about the state of affairs at Lehman Brothers reminded investors that all is not well, not yet.

It was a busy week for earnings as well. For anyone keeping track, we're now halfway through second-quarter earnings season. So far, nearly 70 percent of S&P 500 companies have beaten Wall Street estimates.

But when you break down the sectors, you can see where the true problems are. Eighty-five percent of financial companies reported earnings below estimates. And until the financial and housing sector can stop the hemorrhaging long enough to convince investors that the worst is behind us, we can expect to see more volatility, mood swings, and yes, "Sybil-like" behavior on Wall Street.

As Wall Street power player Doug Kass so eloquently put it this morning, "If you are not facile, fleet-of-foot and you are unaccustomed to the volatility, don't produce (or invest/trade!) -- just watch the movie, eat some popcorn and drink a Duff."

And whatever you do today, try to enjoy what is shaping up to be a rather quiet day for the markets. Because come next Friday it will no doubt be quite the opposite. The jobs report for the month of July is expected to show a loss of 85,000 jobs, with the unemployment rate steady at 5.5 percent.

But according to Deutsche Bank, which expects that level to grow to 6.5 percent by the middle of next year, we're nowhere near the bottom in the labor market. If that wasn’t enough, motor vehicle sales for July will be released, as well as construction spending figures. Both are expected to show continued declines.

July 25, 2008 | Permalink | User Comments (12) | TrackBack (0)

Sue-Friendly Skies: Angry Fliers Take on Delta

July 25, 2008 11:16 AM

ABC NEWS' Alice Gomstyn reports: Does this sound familiar? Man books flight. Man stresses out over flight. Man files seven-figure lawsuit against Delta Air Lines.

It happened in May and now it's happening again: The Associated Press has reported that a lawyer from New York City is suing Delta Air Lines for $5 million for leaving him stranded in Paris for four days during an airport workers' strike.

Thomas Mullaney alleges that, last October, Delta refused to let passengers rebook flights by phone and instead insisted that they go to the airport. Mullaney eventually took an American Airlines flight home and says Delta refused to reimburse him for the unused portion of his two Delta round-trip tickets.

A Delta spokeswoman told the AP she couldn't comment on pending litigation.

Back in May, another man sued Delta for $1 million. Richard Roth, who is also a lawyer, alleged that Delta ruined a family vacation to Argentina and left him, his wife, their two children and his 80-year-old mother stranded in airports without their luggage for three days. According to published reports, Roth said that Delta repeatedly turned down his requests for reimbursement.

July 25, 2008 | Permalink | User Comments (31) | TrackBack (0)

America's Most Coupon-Loving City

July 24, 2008 12:23 PM

ABC NEWS' Alice Gomstyn reports: Has the Brew City become a magnet for bargain hunters? Milwaukee is tops when it comes to U.S. grocery coupon-clipping, according to new analysis by Scarborough Research. A full 40 percent of households in Wisconsin's largest city use grocery coupons at least once a week.

Rochester, N.Y., came in a close second: there, weekly coupon usage stands at 38 percent. Albuquerque, meanwhile, has the lowest number of coupon-clippers in the country, with just 14 percent. The national average is 27 percent.

Overall, Sunday newspapers are the most common source of coupons for American consumers, but Internet coupons are growing in popularity, with more than one in 10 households now downloading coupons from the Web.

A couple of ironies in Scarborough's report:

* On average, coupon-clipping families actually spend $4 a week more on groceries than their coupon-free counterparts.
* Those with higher household incomes are slightly more likely to clip grocery coupons.

Find the full analysis here.

July 24, 2008 | Permalink | User Comments (6) | TrackBack (0)