Investors look beyond oil price hue and cry

Institutional shareholders, unmoved by concerns about high gasoline prices and criticism of high oil company profits, believe their patient investing is now paying off.

"It's a prototypical conundrum," said William R. Atwood, executive director of the $11.5 billion Illinois State Board of Investment, Chicago. "You hate the notion of profiting from everyone's misery, but as an institutional investor you have a duty to maximize return."

At the $29 billion Retirement Systems of Alabama, Montgomery, Marc Green, chief investment officer, said, "The companies are doing the right thing. They are increasing dividends … and drilling for new oil." Alabama is overweight in the oil company group in its active portfolios.

Charles M. Elson, law professor at University of Delaware, Newark, and director of its John L. Weinberg Center for Corporate Governance, said, "Oil companies haven't done anything illegitimate or illegal or unethical. They are the beneficiaries of high commodity prices and (at other times) the victims of low commodity prices."

But Denise L. Nappier, Connecticut treasurer and sole trustee of the $23 billion Connecticut Retirement Plans and Trust Funds, said in a statement: "There's no doubt that today's profits are enormous. As long-term investors, our concern is to ensure that today's decisions are not sowing the seeds of tomorrow's demise.

"Oil prices are rising, as demand across the world increases for this finite resource," she added. "The energy resources the world will need this century are very different than those of the last century."

Singling out Exxon Mobil Corp., Irving, Texas, Ms. Nappier expressed concern about its strategic planning: "Exxon is poised to do well in a world that looks like the past, but the future is going to look very different. As long-term investors, we are concerned that if Exxon Mobil doesn't do a better job of planning for the future, today's profits may evaporate later — and harm investors and the public in the process."

As far as proposals for a windfall-profits tax on oil companies, the Alabama fund's Mr. Green said, "I'm not in favor of it."

"If you put on a windfall tax, oil companies will cut back on exploration and production, enhancing the problems we have already" in terms of supply, Mr. Green said. "I don't think it solves the problem."

Said University of Delaware's Mr. Elson: "I don't think it does investors any good. If you start taxing windfall oil profits, should that apply to other commodities where you have sudden shifts in commodity prices?"

"Is the tax for raising revenue, or is it for some other reason" such as punitive, he asked.

A few years ago, "oil companies were struggling with $18 a barrel for crude and gas at 90 cents a gallon," Mr. Green said. Yet no one came to their rescue then, he added.

On April 21, crude oil rose to a record $75.35. The price of regular gasoline, including all taxes, in the United States averaged $2.914 as of April 24, according the U.S. Department of Energy's Energy Information Administration, Washington.

For the run-up in gasoline prices, Mr. Green blamed especially the crisis in the Middle East and political turmoil in Venezuela. The Illinois fund's Mr. Atwood expressed similar thoughts.

"For a number of years, the big oil companies plodded along with modest returns," Mr. Atwood said. "Now investors are being rewarded for their patience."

"Whatever profits oil companies earn, institutional investors will want to participate," he added.

Mr. Atwood couldn't say whether the oil companies have done anything improper, but said, "If the federal government or regulatory authority determines there has been wrongdoing or improprieties or gouging, that has to be reined in."

"We went through a lengthy period of time when oil prices were low," Mr. Atwood said. "At the same time, demand has been increasing but supply threatened by geopolitical events. There wasn't a lot of exploration because oil prices were low," acting as a disincentive.

"It is the natural market forces at work" — having benefited consumers for years, they now are moving against consumers, he added.

"Investors want to make sure they are adequately exposed to energy just like 10 years ago, when investors wanted to make sure they participated in the technology industry," Mr. Atwood said. "Your success or failure (as a fiduciary investor) depends on how you fill that space" in your investment portfolio.

Mr. Atwood was critical of some of the executive pay packages of corporate executives, including that of Lee R. Raymond, who retired Dec. 31 as chairman and chief executive officer of Exxon Mobil.

Exxon Mobil places the lump sum of Mr. Raymond's retirement package at $98.4 million. Other compensation includes $183 million in stock awards, many of which are restricted from one to nine years following his retirement, according to the company's proxy statement.

"It's absurd," Mr. Atwood said. "Profit Exxon receives isn't because of brilliant … leadership … but because of dumb luck. Prices went through the roof."

"Executive compensation in general is completely out of whack and the oil industry is a good example of that," he added.

"This just points to the large need for a majority vote (of shares to elect directors) and the need for shareholder input on how directors are nominated," Mr. Atwood said.

Mr. Elson also was critical of executive pay packages and design. "It was an entrepreneurial return for managerial actions," he said of Mr. Raymond's compensation. "He got a Rockefeller paycheck without taking Rockefeller risk.

There should be no cap on executive pay, Mr. Elson added, "but there should be better negotiations on designing pay packages."

"Commodity prices have nothing to do with CEO compensation," Mr. Elson said. "You ought to design a package that takes into account fluctuation of commodity prices. You don't want to punish a CEO when they collapse" or reward them just because they rise, Mr. Elson said.

"Pay for performance means profit," Mr. Elson said. "You have to separate out commodity prices."

As for shareholder returns, Mr. Elson said, "Oil companies are making record profits, but in other years they make record losses. It's a swing in commodity prices. It's the market ... a function of supply and demand.

"Commodity prices are set by the market," Mr. Elson said. "In the '80s and '90s, commodity prices fell … no one predicted $70-a-barrel oil a year ago and no one predicted $15-a-barrel oil five years ago."

"It's hard to make government policy on these forces," he added.

Connecticut's Ms. Nappier noted, "We are deeply concerned about the strategic direction of Exxon Mobil, especially under the current circumstances, with gas prices rising and political leaders from the president on down highlighting the need for energy independence and the development of alternative energy resources.

"It is now even more imperative for Exxon Mobil to be an industry leader, instead of an industry laggard, in developing a comprehensive, forward-looking approach to energy issues."