(CTN News) – The earnings season is upon us, and with ExxonMobilXOM +0.5% and ChevronCVX 0.0% reporting huge profits, only one thing can be certain. As they have been accused of once again gouging consumers and causing inflation, they are once again being blamed.
Based on my previous arguments, such thinking reveals an underlying ignorance of economics. The exchange market sets oil prices using short-term supply and demand expectations. Neither ExxonMobil nor Chevron can significantly influence the oil supply, and consumer demand determines supply. Therefore, these firms do not have an impact on prices.
They profit more when prices rise, and high prices are likely to be preferred over low prices. Ultimately, they are profit-making corporations. Although they are passengers on a ship, they are influenced by oil prices as if they were passengers.
The U.S. oil companies are not the captains of that vessel. The OPEC cartel is a different story; it does possess the market power to significantly influence prices.
Therefore, profits are not causing inflation. It is the same factor – higher prices – that causes inflation which is profiting the oil companies.
Scale is, however, a concept that many people do not grasp. In a quarter, if a company made $20 billion in profits, I would have some questions. Can you tell me how large the company is? How much do they spend on capital expenditures? Do they have a profit margin? Why should they earn a certain amount of money?
Therefore, the statement “$20 billion” without any context is meaningless. Let’s examine a few numbers in more detail.
The results of ExxonMobil’s third quarter of 2023 were recently released. ExxonMobil reported earnings of $9.1 billion on revenues of $89.6 billion, according to data provider FactSet. As well as capital expenditures of $4.9 billion, the company paid out $3.7 billion in dividends to shareholders during the quarter.
The net margin of ExxonMobil in Q3 was 11.9% and its return on assets was 11.1%. Income taxes are only available annually, but in 2022 ExxonMobil’s income tax bill was $20.2 billion on a net income of $55.7 billion. Using earnings estimates for the next 12 months, ExxonMobil’s shares trade at a price-to-earnings ratio (P/E ratio) of 10.7.
Google reported GAAP earnings of $19.7 billion on sales of $76.7 billion in Q3 2023. As a result, Google made more money than ExxonMobil on less revenue.
According to Google, the company spent $8.1 billion on capital expenditures in Q3 (more than ExxonMobil) and did not pay any dividends to shareholders.
Google’s Q3 net margin was 22.5% (nearly double ExxonMobil’s) and its return on assets was 17.7%. Google’s 2022 income bill was $11.4 billion on $60.0 billion in net income.
It is estimated that Google shares will trade at a price-to-earnings ratio (P/E ratio) of 20.5 within the next 12 months, which is nearly two times the P/E ratio of ExxonMobil.