☀️☕ Big Oil, Big Profits, Big Dividends, Small Taxes

9 February 2023

Happy Thursday!

US large-cap S&P 500 closed 1.11% DOWN 🔻 Tech-heavy Nasdaq Composite closed 1.68% DOWN 🔻 Pan European STOXX Europe 600 closed 0.3% UP ▲ HK’s Hang Seng Index closed 0.07% DOWN 🔻 Japan’s Nikkei 225 closed 0.29% DOWN 🔻

📝 Focus

Big Oil, Big Profits, Big Dividends, Small Taxes

📊 In the Markets

Panicked traders today: “It’s all over for Google!”Game Over for Microsoft? UK Trustbusting action!

📖   MoneyFitt Explains

🎓 Trustbusting! 

📝 Focus

 Big Oil, Big Profits, Big Dividends, Small Taxes

On Wednesday, French oil group Total Energies announced a doubling of profits to a record US$20.5 billion and joined its “Supermajor” chums with an increase in its dividend and more share buybacks. Then Norwegian state-backed gas giant, Equinor, now Europe’s largest gas supplier, reported $74.9bn in adjusted pre-tax earnings and paying a giant special dividend (along with, to be fair, $43bn in taxes.) Both came a day after BP reported a doubling of profits to a record $28bn… and a dialing back of its energy transition plans. (BP had pledged emissions would be 35-40% lower by the end of the decade but is now targeting a 20-30% cut.)

Earlier, British-but-formerly-Anglo-Dutch supermajor Shell reported its highest-ever annual profit of nearly $40 billion, while ExxonMobil of the US reported $56bn, the highest ever in the Western oil industry. Chevron more than doubled to $35bn.

Overall in 2022, Big Oil more than doubled profits to $219bn, a year in which Russia’s invasion of Ukraine reshaped global energy markets, leading to volatile, higher energy prices and calls for energy supply security in opposition to the industry’s stated climate “ambitions.” (Oil companies also pulled out of Russia, a major energy producer, leading to huge “writedowns” — for example, TotalEnergies’ record profit came even after nearly $15bn in provisions.)

And the top Western oil companies paid out a record $110 billion in dividends and committed share repurchases to investors. Many have been outraged.

“You may have noticed that Big Oil just reported record profits… Last year, they made $200 billion in the midst of a global energy crisis. It’s outrageous.”

Biden also said that Big Oil invested “too little of that profit” to ramp up production to keep prices down, but instead “used those record profits to buy back their own stock, rewarding their CEOs and shareholders” and proposed quadrupling the tax on corporate stock buybacks to incentivize long-term investments since they’d still make a “considerable” profit.

Inevitably, the industry is pushing back, defending their enormous profits by highlighting the importance of energy security during the transition to renewables and suggesting that higher or windfall taxes to ease the pain of struggling consumers could deter investment.

“We wouldn’t be surprised to see oil back to $100 a barrel,”

Back in November, the CEO of Exxon said, with no hint of irony (or self-awareness): “There has been discussion in the US about our industry returning some of our profits directly to the American people. That’s exactly what we’re doing in the form of our quarterly dividend.”

Interestingly, this is coming as more efficient cars, more affordable electric vehicles and a fall in commuting led to 2022 petrol consumption in the US, the world’s largest oil market by far, being 6% LESS than pre-Covid, according to the US Energy Information Administration. And Tesla’s Model Y and Model 3 electric vehicles were the top-sellers in California last year, outselling Toyota Motor Corp’s RAV4 and Camry models. (In California, one in five cars is an EV.)

📊 In the Markets

But the markets didn’t really care that much about consumer and green outrage at Big Oil and their shareholders, or even in comments from Treasury Secretary Janet Yellen that failing to raise the US debt ceiling would lead to “economic and financial catastrophe.” Or even that there may be signs of weakness in the seemingly impregnable Luxury sector with Versace and Jimmy Choo owner Capri Holdings dropping by a quarter on dismal results and forecasts.

Panicked traders today: “It’s all over for Google!”

Instead, traders glommed onto the wording of Sundar Pichai’s Bard generative AI demo of a couple of days earlier, and sold down Alphabet shares by 7.7%, thereby lopping off over US$100 billion from the company’s market capitalisation (share price X number of shares.)

The issue seems to be about which satellite first took pictures of a planet outside the Earth’s solar system. As pointed out by Reuters, actually, the first pictures of exoplanets were taken by the European Southern Observatory’s Very Large Telescope (VLT) in 2004.

The real issue is, of course, if this shows that Google’s Bard is really so far behind Microsoft-backed OpenAI that it would need a Very Large Telescope to even see its exhaust fumes. 

Seems unlikely! Even rival ChatGPT on its landing page clearly states, in its Limitations, “May occasionally generate incorrect information” and that ChatGPT Jan 30 Version is a “Free Research Preview.” The Bing+ChatGPT service currently offered is very limited, as we showed yesterday. Besides confidently making factual mistakes and spreading misinformation, chatbot AI systems can have inherent biases in their algorithms that can skew results, sexualize images or even plagiarise, a minefield for corporations. In a digital ad context, this could be a minefield for advertisers too, as seen in a mini version with Musk-era hellscape Twitter advertisers.

As much or more of a worry for Alphabet might be Microsoft’s willingness to take much finer margins and thinner profits on search, at 6% in 2022, a tiny part of its revenue stream. But for Alphabet, search-targeted advertising is still its key driver (well over 50%). Is Microsoft going to do to Google what Apple, with its App Tracking Transparency framework, did to Meta and the other social media digital advertisers’ business models?

“From now on, the [gross margin] of search is going to drop forever… There is such margin in search, which for us is incremental. For Google, it’s not, they have to defend it all,”

Elsewhere, in chatbots: China

Besides search giant Baidu, with its upcoming Wenxin Yiyan (“Ernie Bot”) other Chinese tech giants are ploughing into the generative AI chatbot space (even though the fastest AI chips, from Nvidia, aren’t available to them anymore.)E-commerce titan Alibaba said that it is developing a ChatGPT-like artificial intelligence dialogue robot that was currently in testing. Internet gaming giant (and pig farm owner) NetEase unveiled plans under Youdao, its e-learning unit, on the incorporation of AI-generated content into its education service, including teaching languages, marking Chinese compositions and more.Zhihu, China’s sort-of version of Quora, shot up 39% yesterday on expectations that the question-and-answer platform could use its enormous data to be a potential database to train language models.

Game Over for Microsoft? UK Trustbusting action!

Even as Microsoft is taking the AI game to Google parent Alphabet with its AI-enhanced Bing search engine and Edge browser (oh no… back to browser wars?!) the UK’s trustbusting 🎓 watchdog, the Competition and Markets Authority (CMA) squished Microsoft’s US$75 billion deal to buy video game maker Activision Blizzard.

In a blow to Microsoft, the CMA’s provisional decision said the deal could “result in higher prices, fewer choices or less innovation for UK gamers” by weakening “the important rivalry between Xbox and (Sony’s) PlayStation gaming consoles” and could even stifle competition in the market for cloud gaming, which is still in its infancy, by adding Call of Duty and other lucrative titles to its cloud-based Xbox Game Pass platform. The final decision will be on April 26. The Microsoft-Activision deal also faces scrutiny from the US’s Federal Trade Commission and the European Union’s competition commission.

The choices the CMA helpfully laid out were to

Sell the business associated with its popular Call of Duty franchise (which has generated $30bn in lifetime sales so far!)Divest the Activision segment of Activision BlizzardDivest both Activision and BlizzardTerminate the deal

Microsoft says that it would still be only the third-largest gaming company in terms of revenues, behind China’s Tencent and Japan’s Sony, and has already made commitments to both Sony and Nintendo to continue releasing its new Call of Duty games on their PlayStation and Switch gaming platforms respectively for 10 years at the same time and on the same terms as on Xbox.)

📖 MoneyFitt Explains

🎓 Trustbusting! Antitrust, monopolies, competition and consumers 

While it may seem anti-capitalistic for a government agency to stop one private company from buying or merging with another on either agreed or hostile terms, there are strong reasons for it to happen!Competition or antitrust laws exist to protect consumers from unlawful monopolies or unfair business practices which would harm them through higher prices and less competition, while benefiting certain powerful companies.The stated mission of the US Federal Trade Commission (FTC) is to protect the public from deceptive or unfair business practices and from unfair methods of competition. The European Competition Commission and the Competition and Markets Authority in the EU and UK have similar mandates.Preventing mergers and acquisitions from resulting in monopolies is perhaps the easiest part of the job, but firms that have become monopolies or overly concentrated market power can also be broken up.Collusion between several companies in formal or informal cartels with practices such as price fixing is also forbidden, though proving it in court can be a lot harder.Weird name, though. The word “antitrust” is most often used in the US and comes from the battle with “trusts”, which were pioneered in the 1880s by oil magnate John D Rockefeller to group companies across US state lines under one controlling legal body specifically to concentrate power and reduce or eliminate competition. Thus was born the Standard Oil Trust. (S for Standard, O for Oil, hence “ESSO”.) Only in 1911 was it finally broken up and split into 34 companies.In the US, both the Federal Trade Commission and the entirely separate Department of Justice Antitrust Division enforce federal antitrust laws, agreeing to take cases based on expertise in particular industries or markets. Perhaps just one agency would seem… monopolistic?

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