Is Oil Too Profitable?

We might as well put the annual report of ExxonMobil (NYSE: XOM  ) on the calendar as a national protest day. It will be the day when everyone complains that it's just not right for one company to make $39.5 billion. Yet the problem with the protest is that it ignores one simple fact -- ExxonMobil is the largest public company in one of the world's largest industries. If it has only an average year, it should set record profits.

Comparing the giants
One way to determine whether or not the profits at ExxonMobil are really exceptional is to compare them with the other large companies. Following is a list of the largest companies, based on market capitalization, sales, and profits:

Rank

Market Capitalization

Sales

Net Profit

1

ExxonMobil

ExxonMobil

ExxonMobil

2

General Electric (NYSE: GE  )

Wal-Mart (NYSE: WMT  )

Royal Dutch Shell

3

Microsoft (Nasdaq: MSFT  )

Royal Dutch Shell

Citigroup (NYSE: C  )

Source: Forbes

Using three different definitions, ExxonMobil shows up as the largest publicly traded company in the world. To achieve "record" profits, it doesn't even need to post higher margins than the other big boys. In the table below, we see ExxonMobil beats its rival Royal Dutch Shell and the everyday low prices of Wal-Mart, and that its profit margin is significantly lower than those companies.

Company

Revenue

Net Profit

Net Margin

ExxonMobil

$377 billion

$39.5 billion

10.4%

General Electric

$160.9 billion

$20.9 billion

13%

Microsoft

$46.1 billion

$11.9 billion

25.9%

Wal-Mart

$338.8 billion

$10.9 billion

3.2%

Royal Dutch Shell

$319 billion

$25.4 billion

7.96%

Citigroup

$81.9 billion

$21.5 billion

26.2%



Not a monopoly
The conspiracy theorists like to claim things like, "They're putting the old Standard Oil cartel back together," as justification for a windfall profits tax. In contrast, ExxonMobil and other oil companies frequently claim that a windfall profits tax will put them at an unfair disadvantage compared to large national oil companies from Saudi Arabia, Kuwait, and Iran, not to mention publicly traded national oil companies like Petrobras (NYSE: PBR  ) and Statoil (NYSE: STO  ) . This argument makes a lot more sense than one might initially think.

ExxonMobil reported average annual production of 2.7 million bpd (barrels per day) and natural gas production of 9,301 million cfd (cubic feet per day). Compare that to the national oil company, Saudi ARAMCO, which produces 9.5 million bpd of oil and 65,700 million cfd of natural gas. Profits from oil production in Saudi Arabia make up 45% of GDP, or somewhere in the neighborhood of $150 billion. Furthermore, oil reserves in Saudi Arabia are 262 billion barrels, more than 10 times the volume of ExxonMobil's proved reserves. By almost any measure, if Saudi ARAMCO were a publicly traded company, it would have a market cap well in excess of $1 trillion.

Foolish final thoughts
If you consider the issue only as an investor, record profits should excite you. After all, ExxonMobil has been one of the top stocks of the past 50 years. The company has been raising its dividends and buying back shares at a healthy clip, and may likely prove to be one of the best stocks into the future as well.

Fool contributor Robert Aronen owns shares of Wal-Mart and Microsoft. Please feel free to email him and tell him he's a shill for the oil industry.


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