API aims to put industry earnings into perspective

The American Petroleum Institute has a Web site, energytomorrow.org, that is featuring a presentation titled, “America’s Oil and Natural Gas Industry: Putting earnings into perspective.”

“It is a fairly new Web site,” Bill Bush of API’s media relations and communications office told NPN MarketPulse this week. “It was designed to be a new resource that makes information about energy as accessible as possible.” The site is for “anyone who has an interest in energy,” Bush said, including policy makers and the public.

Explaining the industry’s earnings is just one of many aims API had in creating the Web site, Bush said. “It’s much broader than economic issues or company financial issues,” he said. “That’s just one part of the Web site—that is important, but there are a lot of other things people need to know about energy, about oil and gas.”

The 11-page presentation on earnings calls pump prices “a fractional story,” and explains that “the biggest single component of retail gasoline prices is the cost of the raw material used to produce gasoline—crude oil. Crude oil alone makes up 56 percent of pump prices.

“Refining the crude oil into gasoline accounts for 17 percent of the retail price. Retailing adds another 9 percent to the retail price of gasoline. Taxes account for 18 percent of the price of gasoline,” the paper notes.

In fact, the report continues, the industry’s earnings “are typically in line with other industries, and are often lower. This fact is not well-understood, however, in part because reports usually focus on only half the story—the profits earned.”

Profits indicate the size of an industry, the report notes, “but they’re not necessarily a good reflection of financial performance. Profit margins, or earnings per dollar of sales (measured as net income divided by sales), provide one useful way to compare financial performance among industries of all sizes.”

The industry’s 2006 earnings averaged 9.5 cents on each dollar of sales, according to the report, while the average for all manufacturing industries was 8.2 cents “or about a penny lower.”

In the period from 2002 to 2006, according to the report, average earnings for the oil industry were approximately 7.4 cents on each dollar of sales—a penny above the five-year average for all U.S. manufacturing industries.

The presentation also poses the question, “Who owns ‘Big Oil?’” It points out, “almost all large oil and gas companies are publicly-traded entities, whose shares are owned by millions of investors through their 401(k)s, retirement plans and pension funds, and other retirement accounts, which own about 41 percent of company stock. The other 59 percent is owned by individuals, investment funds and mutual funds. Americans invest in oil and gas companies to achieve a more financially secure future.”

Some oil companies, including ExxonMobil and Valero, recently reported their first quarter results.

"ExxonMobil's first quarter net income was $9,280 million, up 10% from the first quarter of 2006,” Chairman Rex W. Tillerson said in a statement April 26. “Higher refining, marketing and chemical margins were partly offset by a decrease in crude oil and natural gas realizations.

“In the first quarter, ExxonMobil continued to actively invest, bringing additional crude oil, finished products and natural gas to market. Spending on capital and exploration projects totaled $4.3 billion in the first quarter.

Valero Energy Corporation on April 26 reported first quarter 2007 net income of $1.1 billion, or $1.86 per share, which compares to $849 million, or $1.32 per share, in the first quarter of 2006. First quarter 2007 operating income was $1.8 billion, compared to $1.3 billion achieved in the same period last year. The increase in operating income was primarily attributable to stronger gasoline and distillate margins throughout the company's refining system, according to the company.

"We're off to a great start in 2007, as Valero earned the highest first quarter profits in company history," said Bill Klesse, Valero's Chairman of the Board and Chief Executive Officer.