Can I explain something about "Big Oil" - Part 2?

Question

There is some forward integration - E&P firms may also own refineries, they and other refiners may also own marketers and even retailers, and it's the largest integrated oil companies that are typically referred to as "Big Oil" - but most of the profit is earned at the E&P level - i.e., at the wellhead.

And that's where most of the loss is also realized when prices fall below the projected prices at the time the investment was made.

And you can only hedge 18 months out.

But even with the positive investment, there's a finite amount of oil at the bottom of each well - the company has to maintain reserves or it's a wasting asset. Those mineral rights costs and drilling costs have skyrocketed even more than the price of oil. But the E&P companies CAPITALIZE those - meaning they show up on the cash flow statement as capex and on the income statement are depreciated over 15-25 years.

That's why there are "record profits" but "Big Oil" firms trade at such low P/E multiples.

Answer 1

You have correctly identified what drives profits and losses in the oil industry.

Unfortunately, your logic will be lost on many, primarily because it is much easier to say "it is Bush's fault. He is price gouging for his oil buddies"

Too many people have no concept of economics or the workings of markets. That in itself is not dangerous (although it is pathetic).

However, these ignorant a$$es are now trying to vote into power politicians who promise to confiscate these "obscene profits" and redirect them to other areas. That is where the danger lies- the acceptance of Socialism.

I wonder if these same people will offer to subsidize "Big Oil" when the price of oil falls below the cost of exploration and drilling and these companies take huge hits. Probably not: by then they will have moved on to Pharmaceutical companies making "obscene profits"

Answer 2

My uncle works out on a big *** rig. Seven days on, seven days off. It's fantastic when they hit pay dirt and quite dismal when they hit a dry well.
It's an expensive, risky business.

You have quite a few service vendors that must be paid as well as the blue collar geeks who do the math and geology to find the oil.

I'd say the oil companies for the sake of their own growth would do good to invest in reusable fuel alternatives.

Maybe the whole world should follow Sweden's lead.

Nice part one and part two. Are you in the oil business?

Oil is more than just gas for the car. It is used through out the industrial economic complex in many countries.

Answer 3

why get into all that? just explain that oil companies only make about 10 cents profit per gallon of gasoline, right? Gasoline at $3/gallon costs the same as a gallon of milk. Gasoline is one of the cheapest processed liquids out there...but this does nothing to address our dependency issues, nor does it do anything to reveal how our geo-political motives/actions are *guided by*, and ultimately affect, the price of oil.

Answer 4

So what your saying is I have a capital expenditure in the hundreds of millions to secure the oil well in the first place .
That the investors want a slow gradual increase in wealth over time so that no one will notice the sudden increase in wealth .
Is that why we have a growing number of billionaires .
The rich who already have more money then one could spend in a thousand lifetimes who continue to feed off the poor .

Answer 5

you honestly think libs understand GAAP law? I always say if dems understood finance and federalism they wouldnt be dems. honestly even the ones that may have an inkling of understanding really dont care. profit is not fair. capitalism is bad. heres a nice video that explains why this is.

http://www.youtube.com/watch?v=eaE98w1KZ-c&eurl=http%3A%2F%2Fblog%2E360%2Eyahoo%2Ecom%2Fblog%2DaSj4vUkyeraJMDg7pUMTyB2%2EUmYIRaYpvw%2D%2D%3Fcq%3D1