Money is a funny thing...

Hello everyone,

When I was 14, I used to play a videogame called Caesar III. In this game, you were essentially a city and economic planner for a city which you laid out. I would first start out and build a small water infrastructure, then lay down a few houses, then build some food production infrastructure, and build more houses. This would continue and you would have to carefully manage resources. Sometimes a fire that ripped through a housing district would cause your population to go down and then you didn’t have enough workers to sustain your water infrastructure or your schools or some other important aspect of the society. This break down in infrastructure would cause emigration and then furthur stress critical resources. Poor management could cause your electronic city, painstakingly developed over the course of 2 or 3 hours, to crumble in ten to fifteen minutes.

Needless to say I was the biggest nerd in 9th grade.

Anyway, in the manual for the game, there was one line which I still remember as if I had just read it yesterday:

Money is a funny thing….it’s a means, not an end”

Business would do well to heed these words. Even after a short time as an engineer for corporate America, it is too easy to see that margin expansion has become the only solution that businesses explore to expand their products. While getting more out of what you have is certainly a worthwhile endeavor, big business has always struggled with ability to move and adopt new trends. For sure, Microsoft has been getting hammered in the press for its inability to develop a significant presence in the search and advertising business.

We’ve seen XOM stock simply plummet the moment crude oil prices have gone down. Potash, Monsanto, and Agrium have seen the same responses to oils slide.

By the way, you might remember that I predicted that oil was going to peak in between 141 and 171. I told you so.

Exxon made the decision years ago not to invest at all in renewable energy. BP, Conoco Phillips, and other oil and gas companies have had token efforts, mostly to enhance public image. But if they ever hope to have true stability and true faith of the public, their profits should be used to construct easily profitable ventures in renewable energy. Some ventures are profitable using existing technology. Oil is burned in cars. They could become diversified ENERGY producers, not simply diversified oil producers. There is no loss to Exxon’s oil production and refining business if they make wind farms in the west. Those generate electricity for homes, not oil for cars. In fact, this would allow XOM stock to grow because they expand their total available market, let alone justify less regulatory scrutiny because of some positive environmental actions. BP and Conoco Phillips should utilize their profits to do the same. XTO energy, which has an absurd amount of natural gas reserves (I think its more than 10 TRILLION cubic feet, but don’t quote me on that), should use its profits from the recent natural gas spike to form a joint venture with an automaker and make CNG (Compressed Natural Gas) vehicles a major presence on the road. This is essentially using their profits to create sustainable demand in the future. At the current high natural gas prices, the amount of CNG equivalent to a gallon of oil costs $1.03/gallon. Can you imagine the demand for a readily available car or truck which fuel only cost $1.03/gallon?

I still think that right now is the perfect time for one of these oil companies to purchase an airline. You take a small loss now, but when the price of oil comes back down, you have a great, high-margin hedge against a sustained period of depressed oil prices.

Oil and gas companies need to realize that they can’t just wait another 25 years for another oil boom to boost their profits again. Vertical and horizontal integration is what made Standard Oil, Exxon’s legacy company, into the colossus it currently is. These companies need to understand that even your customers can become vertically integrated and finding new arenas to compete within is not a headache, it is an opportunity.

Money is a means, not an end…

…and if these oil companies use their current influx of cash as a means to generate additional, non-oil sources of revenue or create new sources of demand; their record profits may never see an end.

-Mansij Hans, E.I.T.
Member, Intigril Capital Management

Disclosure: Intigril Capital Management is long Microsoft at time of publication of the "Money is a funny thing..." article.

Additional Disclosure: Mansij Hans is an employee of Monsanto Company.