Answer me this: Why have Exxon Mobil and some of the other oil majors been spending more of their cash on share buybacks than on exploration and production?
If you answered that it’s because the price of crude has dropped over 15 percent, I’d congratulate you for your common sense. But you’d be wrong. No, the buybacks happened in the second quarter of this year – before oil prices dropped. They had, in fact, been at record highs.
The simple answer is that these companies didn’t have anything really promising to spend their tens of billions of dollars on. All the easy oil has already been discovered and drilled. With easy oil disappearing, so has the easy money.
Intel doesn’t have that problem. Nor do Google, Verizon, and a slew of other firms, including BHP Billiton, the big global mining company. BHP digs for profits just as oil companies do. But it’s spending loads of money on dozens of mines worldwide.
Mobil Exxon’s record profits look real impressive. Its revenues are more than the GDP of half the countries in the world. But they’re not reinvesting their profits back into the company at a rate that will keep them growing… and keep the oil flowing.
Investing in the big corporate spenders at a time of looming recession sounds a bit risky, no? Well, you have to spend money to make money. You know that. The companies that are spending wisely on exciting projects now are planting the seeds of future growth. When the economic winter recedes (and recessions don’t last forever), their profits will blossom.
Behind these so-called prudent corporate spenders are companies that have lost their way. They’ll tell you they’re just being careful. Maybe they are. If you don’t have anything good to spend your money on, not spending it on anything is the careful choice. But is that the kind of company you want to invest in? Give me one bursting with new projects… technology initiatives… products in the pipeline. That’s a company that has future growth written all over it.[Ed. Note: One sector that’s got a lot of new projects in the pipeline? The energy sector. And ETR Investment Director Andrew Gordon can point you to two best-in-class rig companies that will be on the receiving end of a $10 trillion tidal wave of cash.]