What do profit numbers tell us?
Energy companies’ quarterly financial reports provide fodder for politicians who see earnings as proof that U.S. oil and natural gas companies don’t “pay their fair share.” The truth is that profit numbers alone don’t provide a complete picture. Profits reflect the size of an industry, but they’re not necessarily a good reflection of financial performance.
Critics like to point out that, between 2006 and 2010, the five largest U.S. oil and natural gas companies had a net income of $484 billion. What they don’t tell you was that, during the same period, these five companies had a profit margin of only 6.65 percent and incurred $377 billion in income taxes, putting their effective tax rate at 43.79 percent.
And that is just income taxes, it doesn’t include the royalties, bonus bids, excise taxes and other transfers U.S. oil and natural gas companies pay to the government. Never mind double taxation on income earned outside the country.
The chart above uses industry averages to show who benefits from oil and natural gas companies’ earnings. This should lay to rest once and for all the idea that oil and natural gas companies are not paying their fair share in income taxes. Additionally, here are some numbers to help lend clarity to the profits debate:
ConocoPhillips reported 2011 first-quarter earnings of $3.0 billion or $2.09 per share. But a look at the full release shows that this $3.0 billion comes on total revenues of $58.25 billion — a 5.18 percent return. We also see that ConocoPhillips paid $4.36 billion in taxes other than income taxes and paid or accrued $2.75 billion in income taxes. To put this in the proper perspective, for every $1 that went to shareholders, $2.35 went to governments.
Also during the first quarter of 2011, ExxonMobil reported worldwide earnings of $10.7 billion. In actuality, ExxonMobil’s U.S. operating earnings were $2.6 billion. The rest of their earnings – more than $8 billion – came from operations in more than 100 countries worldwide. Moreover, they incurred tax expenses in the United States of $3.1 billion on their earnings of $2.6 billion. That’s right — their U.S. tax bill was higher than their U.S. earnings. Over the past five years, ExxonMobil incurred a total U.S. tax expense of almost $59 billion, which was $18 billion more than they earned from their U.S. operations during the same period.