On September 30, the major oil companies completed their most successful fiscal quarter in years.
Talk about embarrassing.
By now the story is familiar, and not just to stockholders or those in the industry: Six of the companies -- BP Group, Chevron, ConocoPhillips, ExxonMobil, Shell and Total -- reported combined net revenue of $36.6 billion.
ExxonMobil by itself had a three-month profit of $9.92 billion, although that included a special profit of $1.62 billion in change it found under the sofa cushions.
Public and political outrage followed those financial reports, even though profit margins for the industry overall ran about 6 percent to 8 percent, nothing spectacular.
Still, unexpectedly high prices for crude oil and natural gas, combined with a recent surge in the price of gasoline, left the big oil companies sitting on a mountain of cash.
What will they do with all that money?
If your answer is "lots more exploration," you could be disappointed.
OK! Here's Our Plan
Major oil companies have long-range spending plans that don't change because of quarter-to-quarter financial fluctuations.
Those plans aren't adjusted much even for year-to-year fluctuations.
"All their projects are multi-billion-dollar, multi-year projects. You can't have a knee-jerk reaction," said Fadel Gheit, senior vice president for oil research at Oppenheimer & Company in New York City.
When big corporations pile up extra cash, they tend to improve their balance sheets by paying down debt.
They also can start or expand stock buy-back programs, which will spread future revenues and earnings over a smaller number of shares. Future per-share earnings go up, comparatively.
ExxonMobil bought back 91 million shares of its own common stock in the third quarter of 2005, at a cost of $5.54 billion.
"First of all, (big oil companies) have reduced their debt to the lowest level ever. The next thing to do is to buy back their stock, and that is what they are doing," Gheit said.
David Nissen is director of the program in international energy management and policy at Columbia University's Center for Energy, Marine Transportation and Public Policy in New York City. His career has included serving in a senior position with Exxon's Corporate Planning Department, and also with Chase Manhattan's Corporate Lending Group.
Nissen recalled reading a recent statement from ExxonMobil about the company's strategy.
"What the guy said was, Exxon has a long-term plan. They invest in good times and bad," he recalled.
When oil dropped to $10 a barrel, Exxon continued to invest in long-range projects to meet its goals. It pursues projects in the same way at higher oil prices.
"Their story was, they didn't cut back then and they aren't going to splurge now," Nissen said.
Explore? Sure. Where?
What will the big oil companies do with their cash?
"I'm not going to predict what's going to happen, because I don't know," Nissen said.
One thing they will do, and are doing right now, is to spend more on exploration.
Don't get excited.
Major oil companies aren't isolated in their market. When they make more money because of higher oil and gas prices, you can be sure their exploration costs are going up, too.
So the big oil companies have announced spending increases to cover higher day rates for drilling, higher supply and equipment costs, higher service company fees, higher everything.
In this case, spending more money on exploration doesn't mean more exploration.
"Oil companies just can't wait to drill more holes in the ground and shoot more seismic," Gheit said. "It's not as simple as that.
"Do you really think oil companies would rather have cash earning two or three percent, rather than investing in a very lucrative business?"
One obstacle Gheit sees for the oil majors is a lack of good territory to explore.
"Where does Exxon go? You have to have an opening," he observed. "Russia is closed. The Middle East is closed. Venezuela does not want to see our faces."
Gheit blames the U.S. government and U.S. policies for part of that problem.
"Why? Because of bad politics, bad policies, everything," he said.
And for all its importance, the oil and gas industry receives startlingly little attention and support from government, he said.
"The Interior Department is not sufficiently staffed to release Federal lands fast enough for the industry to drill," Gheit said.
"The government is taking enough from these companies in taxes and in royalties. Why can't they use that to hire more, qualified people?" he asked.
Nissen noted that many attractive exploration areas are in the hands of sovereign foreign governments with their own national oil companies. Negotiating any kind of entry deal can be frustrating.
"At $10 a barrel those are no fun," he said. "And at $60 a barrel, they don't need you."
Another Buying Spree?
There are always those who hope that the big oil companies will do something madly, magnificently silly with their cash.
Who can ever forget Exxon's Intelligent Typewriter Division? Or Mobil's takeover of Montgomery Ward, the consumer goods retail and mail-order company?
"At one time, Exxon bought the world's leading company in word-processing software," Nissen recalled. "It was criminal, because they destroyed the word-processing company."
Chances of similar, goofy investments by the oil majors today are just about nonexistent, according to Nissen. The industry has learned to focus on what it knows.
"People have gotten a lot smarter about what their core competencies are, in all industries," he said.
What should the big oil companies do with their cash?
If your answer is "buy other oil companies," you won't be disappointed.
Gheit foresees another round of "strategic acquisitions" in the industry.
Nissen acknowledged connections between oil company mergers and good financial times in the industry, especially times of high stock prices.
"The first order of connection is, companies buy other companies when they think it adds value. And it's cheap to do it when they think they can do that with stock," he said.
Part of the public wants major oil companies to invest in developing energy alternatives to oil and gas.
In solar, wind and other alternative energy investments, there's a cultural divide between European-based big oil companies and U.S. companies, according to Nissen.
He considers it a question of core competencies for American firms.
"If you finally succeed in making solar equipment, for instance, you are making either power plants or, collaterally, something like wallboard or appliances," he said. "That's what General Electric does."
But the large energy companies in Europe have a social basis for backing renewable or alternative sources, Nissen observed.
"Europeans do it because European cultures want their companies to be (technology and product) champions," he said.
Takeaways and Turnabouts
What the major oil companies definitely don't want to do with their cash is give it up to higher taxes and other government takeaways.
"This is capitalism. This is not communism, for heaven's sake. Money is going to go where it is treated best," Gheit said.
"If we start tinkering with a Windfall Profits Tax, all these countries will start taxing these companies at a higher rate," he predicted.
In Gheit's view, countries where major oil companies operate will look at any Windfall Profits Tax in the United States and say, "Why aren't we getting that money?"
They will then raise their production taxes, royalties and other takeaways to reduce the major companies' profit levels.
Talk about taxing away profitability drives Gheit a little bananas.
"When (Venezuela President Hugo) Chavez said that two years ago, we called him a crazy communist. Now, guess what? We're borrowing his plan," he said.
Any move to an additional profits tax will discourage exploration, not encourage it.
About the only thing that will lead to a meaningful, industry-wide increase in exploration is a change in management perspectives.
Investment plans and strategies do change, although fairly slowly, and not in response to one or two years of good or bad results.
They come when management believes the game has changed, especially in terms of future payouts. And there are signs of changing attitudes.
Nissen said he recently attended a high-level conference to discuss exactly those kinds of changes.
"The peak (in oil production), whenever it comes, signifies a shift in market power and not a disappearing resource," Nissen said. "Will the character of the market shift? Yes. Will there be a shift in market power? Yes.
"All of that is happening, and it will continue to happen," he added.
What should the big oil companies do with their money?
If your answer is "lots more exploration," you could be disappointed -- but maybe you won't be.
The industry's response to that question will take shape not in the next few months, but over the course of the coming years.