Monday, February 02, 2004

What Will $4.5 Billion Buy?
ExxonMobil was in the news several times last week. They reported earnings for 2003 of roughly $21.5 billion, a startling figure in any business at any time, but about what you might expect from the world's biggest oil company in a year with high prices for both oil and gas. The other main story related to a revised judgment against them for the massive oil spill in Alaska from the tanker Exxon Valdez. The judge set $4.5 billion in punitive damages, and the New York Times suggests that Exxon should pay and move on.

At a time when the nation is running deficits of nearly half a trillion dollars, this amount seems paltry by comparison. And Exxon's assets are worth over $150 billion, so it might seem large but not unmanageable, right? In short, it is easy to lose touch with the value of this kind of cash to a real company and its shareholders.

For example, Exxon produced 900 million barrels of crude oil in 2002. If their cost to find and develop new reserves to replace each barrel they produced that year--to keep their production from declining in the future--were $4.50/barrel, then the proposed penalty is on the same order of magnitude as one of Exxon's largest and most important activities.

Another useful comparison: Exxon annually pays out over $6 billion in dividends to shareholders. In fact, when you subtract out their dividends and all capital and exploratory investments, what you have left out of the $21.5 billion of profit is about what they paid out in 2002 to repurchase shares of their stock, which presumably increased the stock price for their investors.

Let me state clearly that I am no apologist for Exxon. The Valdez disaster gave a black eye to the entire industry, and it was preventable. Exxon should pay for all the damage it caused, and some amount above that. But judges should also carefully examine the true value of the penalties they impose, and resist the easy temptation to read no further than a company's quarterly earnings press release. Setting the punitive damages so high merely ensures that the award will be appealed for years, further delaying any payout to those whose interests were actually harmed in an incident that took place in 1989.

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