Wednesday, March 26, 2008

building the new apollo

I just saw the president of shell oil, John Hofmeister, on charlie rose.. he was one of the most interesting guests I've seen on the show. I liked him at first, but I found his low expectations for real alternate energy disappointing. at one point, he started whining about how it takes years to get wind turbines because of the huge over-demand in the industry.

this is the kind of foot-dragging, time-card punching corporate excuse-making has got to stop.

first of all, I have encountered many web sites where random hippies have built wind turbines in their spare time. for example:

it's really time to put something in perspective. does he really expect us to believe that when auto workers are being laid off across our industrial heartland, somehow he's not able to build a turbine? it's essentially a refinement of 19th century technology... our industries can easily produce wind turbines in great number. we're the country that went from making 3600 airplanes in 1940 to over 96,000 in 1944. this kind of hand ringing by an executive at shell is simply unacceptable. america has overcome much bigger obstacles than this before. if we kept russia and britain fighting during WWII, we can surely build some windmills.

here are some simple mathematic truths:
in 2007, shell paid $9bln in dividends and bought back $4.4bln of stock... that's $13.4bln given to investors.

COP paid back $3bln, CVX: 11bln, and XOM with a massive $39.3bln -- together these companies transferred $57bln of capital to their shareholders. these companies have A-AAA ratings, with vast financial resources... it's a bit pathetic for one of them to whine about a lack of wind mills when his buybacks and dividends totaled three quarters of the entire revenue at Boeing!

it's time for america to stop giving a pass to oil companies. they have profited for years from our public lands, our diplomacy and our trade negotiations. yes, they have a right to profit and reward their shareholders. and, their lobbying power makes them a pretty formidable adversary. it would be very hard doing anything direct like taxing these shareholder payments.

first, let us consider what they actually are: capital transfers. investors are essentially being told to pack it it, cash out their holdings and sell the shares.... what happens to the value? most likely, XOM will simply be a source of funds for years at its current pace. recently, it seems possible some of the money from selling XOM was used to cover losses in the credit market. that's a recipe for neither greatness nor stock rallies.

some of that capital -- that economic value, capable of mobilizing thousands of human beings and their resources -- will almost certainly leave the stock market over the next few years and may not come back. XOM is the largest member of the DJIA at a market cap of $455bln, towering over MSFT at $271bln and WMT at $212bln.

if the fed is willing to prop up bear stearns, why can't the government give a boost to stocks by cozying up to XOM?

how about instead of letting the oil firms just pay back shareholders, we find a way for them to keep their capital and build entirely new industries? after all, they have terrific expertise and can deploy resources in the US.

why not let them create new subsidiaries that can be spun off to shareholders in new transactions. why aren't we trying to ask the oil companies: how can we help you make your shareholders richer? that's the only thing they care about. why not ensure the best outcome by establishing targets: the fledging company needs xx in revenue, xx in profit .. and other targets. if they're met, you allow the oil companies to transfer xx billion in cash to the new companies. those new companies can then pay it as a tax free, or reduced tax, dividend. this would allow a cheaper transfer of wealth to shareholders while at the same time giving birth to new businesses and jobs.

we already know people are cashing out of the oil majors. what kind of executive is happy to see his shareholders as net sellers? it's kind of embarassing the market wanted to dump almost $40bln of our country's largest corporation last year. I don't have time to dig through its financials, but I don't think you can say the same thing about petrobras!

it says a lot about what's happening in the world right now where brazil's oil company is move loved than our own. they have new, booming reserves... we have some fields we've been pumping the last 100 years that now we're just letting run down and not replacing reserves.

the market knows about these issues and will continue to sell these stocks. as long as oil remains strong, they will edge higher. they're clearly lame compared to many other oil companies -- not just petrobras, also the great american name XTO. their stock is about to go parabolic and climb the wall higher.

getting back to XOM and the cash-oozing oil majors. I think we need to create a way for oil companies to develop and deploy new energy resources on a massive scale. say they kept about $10bln of their $50bln+ in shareholder payments, and created new ventures to produce wind mills, solar panels, concentrated solar arrays and geothermal on a massive scale. right now, there is a small company called Ormat that's profitably doing small amounts of geothermal electricity generation. I don't know why someone hasn't coughed up $1.8bln for them and scaled their technology to the rest of the continent.

many opportunities such as this exist. for example, First Solar, the largest solar panel operator, brought in just $500mln last year. just a few billion of those huge oil windfalls could spur entirely new businesses. some of them might create integrated consumer companies that install and service people's renewable energy needs. others will find ways to make home energy from food waste, etc.

say they put $10bln in into the new areas. have the law provide that one day they can spin off the company in a particularly advantageous way. maybe allow the new entity to emerge with a stash of cash that would be paid to shareholders in a TAX FREE dividend payment. this would allow XOM etc to return large amounts of capital to their investors at perhaps even better rates. and, it could be structured in a way to maximize the probability of success: companies would need a certain level of revenue, jobs, profitability, taxable income etc. a year or two after going public, and once they met the description of a healthy growth company, the parent oil company would have the right to transfer the cash to the child for distributions. this would immediate establish owners of these new companies.

that's might get Rex Tillerson's attention.

so, we should create a new legal concept: the society-improving start up. we say that if a business 1-helps cut carbon emissions 2-installs, makes solar wind etc, 3- etc, etc, ... then they qualify for being spun off under this new energy umbrella. that umbrella would be negotiated with oil firms and their lobbyists. it would keep capital in the US equity market and restore job growth. on top of that, we could create some large cap multinational industrials out of thin air. and, fast-growing non-oil companies would trade at much higher multiples than XOM and its peers do now.

here's some interesting background on why the oil majors will slowly fade away:

2 other things to mention... the guy from shell did mention a huge potential factor in the world oil market: Iraq. this is something I have mentioned for years... iraq has the biggest and cheapest to produce oil fields in the world. there might be a law coming soon that would start to open it up to investment, but you have to think we would't see any big increases in production for several years, so it shouldn't matter to the oil markets -- yet.

another thing to watch, of course on oil, are PBR and XTO.

also on charlie rose, he had guests about how all these bats are dying in new york state. added to my worries about us running out of bees, this alarms me. I have heard more than a few investment experts saying we might have real food shortages in the world. it's time to get worried about our ailing wildlife. so far, the main ones to get hurt have the species that are useful to us...

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