The Slippery Slope Of Taxing Big Oil

Todd Shriber
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Another earnings season is drawing to a close and to put things in the most basic of terms, big oil made big profits in the first quarter. If you want go over the numbers again, all of the major oil earnings reports can be found in the news section of OilSlick (HERE), but I will briefly mention the highlights.

Exxon Mobil, the largest U.S. oil company, earned a staggering $10.65 billion in the first quarter. Chevron, the second-largest U.S. oil company, earned a cool $6.21 billion. Combine those two quarters and assume profits at both companies remain flat for the next six quarters and Exxon (XOM) and Chevron would have almost enough in profits to acquire Facebook assuming the social network's rumored valuation of $100 billion is accurate.

That is a cute anecdote. What is not cute is the potential impact higher taxes on the oil industry would have. I am not talking about politics here. I am talking about unintended consequences. Savvy investors know better and if you frequent OilSlick, I a willing to bet you fall into the ''savvy'' category, but it seems unknown to some that big profits from big oil are a big a good way.

Obviously, there is the job creation factor, something that should not be diminished nor ignored. The factor I want to address is dividends and just how many folks depend on payouts from companies such as Chevron (CVX) and Exxon. It has been argued by some members of the Wall Street crowd that dividends and buybacks, not increased production, have been the driving forces behind much of the returns delivered by big oil stocks in recent years. If that is true, then the integrity of oil dividends needs to remain in tact.

I researched the top holdings of three major state pension funds from three very different areas of the U.S. The California Public Employee Retirement System (CALPERS), the Teacher Retirement System of Texas and the New York State Common Fund. Combined, these pension funds provide retirement benefits to tens of thousands of retirees and all three share something in common: Exxon and Chevron can be found among their top holdings. Sure, pension funds hold growth stocks as well. All three of the funds I just mentioned have or recently have held stakes in Apple (AAPL), but dividend stocks are the bread-and-butter equity holdings of many pension funds.

One only needs to remember recent history to realize how important oil dividends are to pension funds. When BP suspended its dividend following the Gulf of Mexico oil spill last year, it was pension funds in both the U.K. and the U.S. that cried afoul. In fact, pension funds from New York and Ohio can be found among the lead plaintiffs in litigation against BP (BP).

There are other reasons for that beyond BP's dividend, but you get the point. Any government action that crimps oil profits has the potential to hamper dividend growth. It is not just the payout that matters. It is the expectation that the payout can be depended on to grow over time. In other words, it is probably best to think twice about higher taxes on big oil because the unintended consequences may far outweigh the benefits.