Motley Fool Hidden Gems Investing - Motley Fool Money: 05.11.2012

Episode Date: May 11, 2012

JPMorgan Chase racks up a big loss.  Disney reports big earnings.  And Berkshire Hathaway gets involved in a bid for Avon.  Our analysts talk about those stories plus share three stocks on their radar.  Plus, we talk about the business of oil and gas with Pulitzer Prize-winning reporter Steve Coll, author of Private Empire: ExxonMobil and American Power.   Learn more about your ad choices. Visit megaphone.fm/adchoices

Chris Hill. Everybody needs money. That's why they call it money. From Fool Global Headquarters, this is Motley Fool Money. Welcome to Motley Fool Money. Thanks for being here. I'm your host, Chris Hill, and joining me in studio this week for Motley Fool Inside Value, Joe Mager. For Motley Fool Income Investor, James Early, and for Million Dollar Portfolio, Ron Gross. Gentlemen, good to see you. Ron Gross. Good to see you, Chris.

We have got a big deal brewing in the cosmetics industry. We've got big earnings from Disney, but we begin this week with a big loss from a big bank. JPMorgan Chase announced it lost $2 billion on a massive trading bet that went south. In a conference call on Thursday evening, CEO Jamie Dimon said the bank's strategy was, quote, flawed, complex, poorly reviewed, poorly executed, and poorly monitored. Other than that, James Early, it sounds like everything just went fine. It sure did, Chris. I'm searching for an analogy.

Maybe it's something like somebody who just got his license back after a DWI, getting caught with an open bottle in the car. I mean, it was only last year that Jamie Dimon was criticizing the Volcker Rule, saying it would impinge on banks' ability to trade derivatives. And we certainly wish it would have impinged on J.P. Morgan's ability here because this was a huge loss for a single trade. For a big bank, it's not a massively financially significant number, and I'll say this is a mark-to-market loss.

In other words, it's not a cash loss, but it also means that it could still get worse. The position is still on. Ron? Yeah, I'd like to know a little bit more as we get more information. Was this about proprietary trading, or is it as what they say it is? It was really about a hedging strategy to help offset other aspects of their business, which is a perfectly rational thing to do. So, however, was it not monitored, as you said, correctly? Was it ill-devised, the strategy?

Where are the parents here watching what the children are doing? O' Joe Maker, The Wall Street Journal called this the rare black eye for Jamie Diamond. You actually listened in on the conference call. What did you think? I did. He sounded furious. He was absolutely upset that the company had made the mistake. He was upset with his employees. He sounded upset and disappointed with himself for not having better controls around that. But I do think that this is a one-time incident, and the market definitely isn't responding that way. The stock's off like 8%. You know, where there's smoke, there's fire, and that's something that we've had kind of pounded into

our heads with financial stocks over the last few years. But at the same time, these guys do have great track record, and I think it's important to remember that Jamie Dimon and J.P. Morgan have done an excellent job of managing themselves through the financial crisis and do deserve some benefit of the doubt. James? Chris, I'll just add two things for perspective here. If you're listening and wondering, this sounds kind of complicated. First of all, J.P. Morgan is sort of like the godfather of derivatives of all the big banks.

In the top five banks, trade most of the derivatives. J.P. Morgan is really the biggest by far. But the second thing is this is not just so much a directional bet. The way the markets work, especially in these weird derivatives, is that you have people moving against you. And this was a bet, from what I'm reading, on a very illiquid index. And the trading volume was low, and other hedge funds sensed that J.P. Morgan had too big of a position. They couldn't get out quickly, so they began to trade against the bank. This is what happened with long-term capital management.

This is a famous hedge fund years ago that blew up. And so, in other words, it wasn't just the raw bet, but it was sort of the parasitic action of the markets that also took this position down. Was this out of the London office? Is that right? London, yeah. Is it me, or does it seem like a lot of these seem to come from the London office? The rogue trader. Yeah, or Goldman's problem with the disgruntled employee, I believe, was London. Maybe it's something in the water.

At least he got a good nickname out of it. Simon Johnson, the economist and someone we've had as a guest on our show, came out and said that the buck stops with Jamie Dimon. He said if this were a company like Boeing or Caterpillar, and one of those companies lost as much money relative to operations, the CEO would resign. Give me a break. I'm sorry, that's ridiculous. They had this trade blow up on them, but they've coasted through the financial crisis better than anyone. They've come out much stronger. It was a big mistake, and people should be held accountable,

but it's not something to resign over, over the track record and the success that he's had. But that is what makes the case for bank regulation so strong, that even the best bank, even the golden child of Wall Street, can still screw up this badly. Right. Buck does stop with the CEO, but this does not rise to the level of requiring a resignation, not even close. Well, so to James' point, is that part of why Jamie Dimon was sounding so angry on the conference call? Because he's really been the guy out in front challenging the Obama administration on the Volcker Rule, and it seems like a mistake like this takes the bat out of his hands. Chris, I have a quote. He says, just because we were stupid doesn't mean anyone else was.

And that's not an unusual quote you get from a Wall Street CEO. He is defensive about that, yes. As you guys have indicated, there are other big banks that play this game, Citigroup, Bank of America, Goldman Sachs. For investors who are looking to get exposure to the financial sector, but just don't really have the stomach to wake up and see this kind of bet go bad for their stock, what do you tell them, Ron? I've always stayed away from financials as investments, because I never thought I could fully understand what isn't on the balance sheet and fully understand the business. But if you do want to play that, and I've done this personally, I've done it through

an ETF, a broad-based financial ETF, or a mutual fund that's focused on the financial services industry, that way you don't really have all your eggs in that one basket. James? U.S. Bancorp is a little bit smaller than these big banks, and it's a lot less of a Wall Street type of bank. Another option is to go Canadian. I like Bank of Nova Scotia. This is an investment recommendation in my newsletter.

There are some good banks abroad that aren't as embroiled in this stuff. Joe? Yeah, I think J.P. Morgan looks interesting. You know, you want to be greedy when others are fearful. And right now, JPM is selling at a bigger discount to tangible book value than it has for 96% of the last decade. It doesn't get a lot more fearful than that. You just made that up, didn't you? I checked it out this morning.

I saw a graph. You showed me a graph. Joe does his homework. I'm impressed. Fragrance maker Cody is making another bid for Avon. Ron, the bid is now up to $10.7 billion. And the new wrinkle here is that $2.5 billion is going to be financed by Berkshire Hathaway. Yeah, I don't think it changes anything about the deal.

Berkshire gives the deal, let's call it credibility, for lack of a better word. But still, if the management of Avon thinks it's not a good deal for shareholders, if they think it's still a deal that's undervalued, they're not going to accept it, even if some of the equity capital happens to be coming from Berkshire. And I think that's what this is going to hinge on. and I believe they really only have until Monday to respond, and then the deal is off the table. Of course, it could come back. You never know. I don't really think the Berkshire part of this is that big a deal.

Joe, what do you think? We have a new CEO at Avon, Sherilyn McCoy, who came over from Johnson & Johnson. And as we've talked about before, Avon is a company that has a lot of challenges. On some level, should she just take Warren Buffett's money and run? I think so. Take out on that golden parachute for a quick few months' work and move on to a new job. I mean, she could move into another CEO slot pretty easily. Speaking of Warren Buffett, Berkshire Hathaway's annual meeting took place last weekend. As we've said before, it's Woodstock for Investors. Joe Mager, you were there.

It was crazy! What was the big takeaway for you? A couple takeaways. One is that Warren and Charlie are still going strong. I think a lot of people were worried about how Buffett would be feeling and just seeing how he would handle himself given the backdrop of his having prostate cancer and taking treatments on that starting in July. He's a human encyclopedia and it still showed he had plenty of energy, was very sharp, and I think anyone walked out feeling confident in that. The second thing is that Buffett gave a little more color on how he thinks about valuing

Berkshire. The stock's underperformed over the last three, four years, and it's outperformed the market by vast sums over the longer time horizons, and people have been disappointed. But I think when you hear him talk about the valuation and how strong he is talking about how cheap the stock is, that's really interesting. And it's tough to ignore when you've got the best investor in history talking about the stock he knows best, saying it's cheap. Ron, one of the things that Buffett mentioned during his marathon Q&A session on Saturday, He made reference to a $22 billion acquisition that Berkshire Hathaway got close to making just in the very recent past and ended up not pulling the trigger on. And he did go on to signal that he's looking to spend.

Did that get you thinking at all about, if not, what was the company, as I think a lot of people were trying to figure out, but even just what industry is Berkshire Hathaway looking into? Definitely curious as to what it could be. My guess is it's some sort of capital-intensive infrastructure, industrial-type company. On one hand, it's scary. That's a lot of money to put into one place. But on the other hand, he's been telling us for a long time now that he's looking for large acquisitions, and he's going to put that capital to work rather than return it to shareholders. So we shouldn't be surprised when he comes up with something like that.

But $22 billion is a big number. So would your elephant gun be similarly loaded if you were in Buffett's shoes? I think I personally would be paying a dividend. Okay. Coming up, the latest earnings from big tech and the video gaming industry. Stay right here. You're listening to Motley Fool Money. Welcome back to Motley Fool Money.

Chris Hill here in the studio with Joe Mager, James Early, and Ron Gross. Shares of tech giant Cisco Systems down 8% on Thursday after the company's latest earnings. Joe Mager, CEO John Chambers put some of the blame on the economic situation in Europe. You buying that? A little bit. A little bit. Because I've been seeing that from a lot of companies that I've been following. But at Cisco, I think it really just cuts to an execution problem. They talked about longer sales cycles on the conference call. Sometimes that's IT managers are waiting to make a big ticket purchase. But the other hand is, it's probably just they're not actually

selling things well. And when you listen to the Intel call- That's a problem if your business is selling things. Yeah. Intel isn't running into those same problems, and they are addressing essentially the same enterprise market. Well, Intel's products are a little cheaper, though, right? Which might make- That's true. That's true. Yeah, it's not apples and oranges. Or it's not apples and apples. It's apples and pink lady apples. Yeah. Pink lady apple? It's a slight difference, but- Is that your favorite apple?

I'm a big fan of the pink lady. Really? Okay. It's a great apple. I'm a Macintosh guy. Electronic Arts, nobody cares what your favorite answer is. Electronic Arts' latest earnings came in higher than analysts were expecting, but that was overshadowed by the news of a big drop in the number of subscribers for the EA game Star Wars The Old Republic. James Early, what do you think? So Electronic Arts made a big effort to copy, you know, World of Warcraft is the Activision product, right? Subscription-based game, very popular.

So they put a ton of money into developing the Star Wars New Republic game. that subscriptions for fell 24%. There were a lot of weird glitches in the game. People were getting stuck in the wall, disappearing into the floor, then popping back up. You try to have your character say a friendly dialogue, but then he insults the other character instead.

I was reading it's pretty, it's people get freaked pretty fun, actually. So yeah, I mean, the game just didn't execute as well as they wanted it, and the results are down. Ron, Activision Blizzard also reporting this week. That's a stock that you follow closely. Shares up more than 4% for the week,

so I'm assuming it was a good quarter. It was a good quarter. They beat estimates, they raised guidance, they repurchased 22 million shares, which I think is a great use of capital at the current stock price. This is a stock that really refuses to go anywhere. But one day, we're hopeful, because they continue to put up really good numbers. Their new Skylanders product, they sold 30 million toys that are associated with this new game since the launch. amazing. The Call of Duty franchise is good. World of Warcraft has stabilized. $3 billion in cash, no debt. We love it. O'Reilly. Why do you think the stock isn't really moving?

Because this seems like one of those businesses that, to the point James was making about electronic arts, it seems like in the video gaming industry, the stocks should respond to the basic numbers coming out. So, it's perfectly reasonable that EA shares are down on news that they're losing all these subscribers. Well, as the only guy in the office who's not an Activision fan, I think it boils down to concerns about how World of Warcraft is stagnant. It's not shrinking, but it's essentially stagnant. And the rest of the business is really kind of a studio production model. Exactly. It's like a movie. You have

to come up with the next big thing, although there is recurring revenue, and we're thrilled that the gaming industry has moved towards more of a subscription-based model. But you still need to come up with the next big blockbuster, and investors don't really love that. And as we touched on earlier in the week on our MarketFoolery podcast, Joe is not an Activision Blizzard fan, but he ... He loves Blizzards. At one time was a fan of Farmville. He's a Dory Queen Blizzard fan. Walt Disney Company's second quarter profits up 21% thanks to strong numbers from the theme parks and the cable TV channels.

Ron, what do you think? You know, even with the John Carter debacle, and it was a debacle, they continue to post great numbers. This is a stock I sold too soon. I just still do want to personally, however ... My children actually own it. Avengers, doing great numbers. As you said, the parks, up 53% on the operating income line. That's pretty impressive. And ESPN and ABC continue to do well. So, the company really, really continues to put up great numbers, and the stock has responded.

Have you seen Avengers? I haven't. I was going to drag my wife, because it was my birthday on Saturday. I typically drag her to a superhero movie. Last year, it was Green Lantern. You might have trouble getting her to go this time. I let her off the hook this year. We didn't make it. Thank you very much. Just to close out on Disney, I mean, as you mentioned, Ron, very diverse business. Is the theme parks chunk of their business?

Is that the most undervalued part? Because it seems like, particularly ESPN and the cable TV, that's the one that they're depending on every quarter. I don't know if I'd use the word undervalued. That business isn't as important to me as the other pieces of their business. But they do have some interesting growth things coming. Shanghai Disneyland, for example, is right now under construction. We'll see how that turns out. It's supposed to be a pretty nice growth driver, but I focus on the other parts of the business more. O' Okay. We will wrap up this segment

with the stocks that are on our radar. We'll bring in our man, Steve Broido, from the other side of the glass for a question. Each one of you, Ron, you're up first. What's your stock this week? I'm going to circle back to Cisco, CSCO. Two weeks ago, before the stock got smacked, an investor that I respect very much pitched me on it and recommended it. And I said, well, I don't get those technology. I pulled a Buffett. I said, I don't get those technology companies. But I think networking, I think I can understand this if I dive in a bit. And it's only 4.5x cash flow right now, 12x P-E ratio. It could be cheap. And if I can spend the time, it might be interesting.

And the ticker symbol? CSCO. Steve? Ron, can you explain what happened with Cisco and Flipcam? I wish I could. I am an owner of Flipcam, and I think it was gangbusters for a while. and it just didn't do what it wanted to do. It wasn't the space that they really needed to focus on. And they said, you know what, we're going to cut and run. James Early, your stock this week?

Chris, TechStainer is a recommendation, actually, of my income investor service several months back. The ticker is TGH. They basically own a lot of shipping containers, you know, the metal kind of like oblong boxes you put on trucks. They're intermodal, they call it. You can put it on a tractor trailer, put it on a train, put it on a ship, and they lease them out. So it's helpful to be big because you can own a lot because that way you can match one guy's shipping route with someone else's to return the container back. You can involve the military. So it's this kind of weird business, somewhat capital-intensive, pay a decent yield, and there's not a ton of competition either.

When they're done with these, this is one of my favorite parts, there is a big industry buying these used shipping containers for a couple thousand bucks each and building modular homes out of them. It's like an eco-trend. Okay, so potential housing play for you there too, Steve. What do you think? My question would be about oil prices. So it seems like the shipping industry gets really whacked when oil prices rise. Is that correct? The shipping industry is economically sensitive in general, yeah, and oil prices affect that. But this is one step, the container business is one step removed from the pure shippers.

In other words, if I'm actually shipping cargo, my stock price is probably more volatile. If I'm just leasing the container, I'm a little bit less sensitive. So if you want shippers but without quite as much fun, containers could be your option. And don't forget his favorite part, the economic, the eco-friendly part. Yeah, if you have an amenable homeowners association, you could build a house for $10,000. They do anything with reclaimed wood. I don't know if they go that far. It's just a metal box, pretty much what it is. Joe Mager, your stock?

Yeah, Markel. I saw the executive speak this past weekend while in Omaha. It's basically a specialty insurance company in the mold of a mini Berkshire Hathaway. So they focus on specialty insurance for things like boats, which most people won't insure, or bars. They get great premiums on that, turn around and invest the money in long-term businesses. It's attractively valued. I like it a lot. Steve? What is Markel's most unique thing that they insure? I would say bars are a pretty good one.

There's not a lot of competition for that. I think they do weddings as well. Ballet studios are interesting. Horse, dude ranches, that kind of stuff. The dude ranch market. What are they insuring, exactly? The dudes? Hey, accidents happen.

All kinds of problems go wrong. Accidents happen on the dude ranch. Three stocks, Steve. You got one you like? Markel, I've heard wonderful, wonderful things about, but I do like James' shipping company as well. Cisco, I think I've owned in the past and have sold. It has not quite worked out for me.

Thanks, Steve. Ron Gross, James Early, Joe Mager. Guys, thanks for being here. Thanks, Chris. Coming up, we will talk about oil, ExxonMobil, and the man they call Iron Ass with award-winning journalist Steve Cole. Stay right here. This is Motley Fool Money.

Welcome back to Motley Fool Money. I'm Chris Hill. Steve Cole has won the Pulitzer Prize on two occasions, most recently for his 2004 book about the CIA entitled Ghost Wars. His new book is Private Empire, ExxonMobil, and American Power. And Steve joins me now. Steve, thanks for being here. Thanks for having me, Chris. What got you interested in writing, not just about the oil industry, but ExxonMobil in particular? Well, I was inspired by a book called The Prize that Dan Yergin brought out 20 or 30 years ago

about the era of expansion and discovery in the global oil industry. And after 9-11, working on Ghost Wars and other projects about America and the Middle East, I thought it was time to go back to the subject of oil, but now in an era of constraint and limits and violence. And once I started down that path, I thought I should choose a single company to tell the story. And for the United States, ExxonMobil was it. It's the largest corporation headquartered in the United States now, and the most durable oil company that we've had over the whole 20th century, so it became a way to tell a larger story. I think a lot of people, when they hear ExxonMobil, they think about the Exxon Valdez and that whole incident. One of the things that you

rightly touch on in your book, how did the Valdez accident, how did that whole episode affect ExxonMobil? How did it change the company? Well, it shocked them. Of course, They lost their reputation. They had expensive settlements to endure. Internally, they came to the conclusion that they had allowed their operating discipline and their internal management practices to slip. that it shouldn't have been the case that the captain of a ship carrying that much oil could have had drunk driving arrests on his record and not been taken off the ship. Something was wrong. So they undertook these sweeping reforms to try to wring out human fallibility from every aspect of their daily operations,

to try to idiot-proof their global systems as much as possible and to automate them. And they developed a system of interlocking kind of manuals and rule regimes that became known as the Operations Integrity Management System, OIMS. If you go to work at ExxonMobil, you will get to know OIMS right away. It's a series of binders that tell you what to do about just about everything. And so they really tightened up. And the leader of the company at that time, Lee Raymond, essentially saw the crisis that the Exxon Valdez created as an opportunity to shake up what he thought was a pretty entrenched bureaucracy. One of the things you touch on in the book, and it obviously wraps into the Valdez accident, and that's this whole notion of reputation, corporate reputation. And one of the questions that gets raised at ExxonMobil is essentially, well, should we even care about this?

To what extent do you think ExxonMobil should care or does care about their reputation? Yeah, it's a fascinating question and one that I tried to poke at in different ways during the research. I think, first of all, they are very unpopular. They know they're unpopular. They're smart people. They can read their own polling data. One of the conclusions they've reached is that their unpopularity with the American public has as much to do with the state of gasoline prices on any given day as it does with their own corporate performance. Since they can't actually control gasoline prices, since they're set on a world market, then they're basically unable to control the dial of their popularity going up and down.

That led them to sort of think, well, then it doesn't matter. I'm not sure they're right about that, because ultimately they're a science organization, a technology organization, and their business viability over 20 or 30 years looking out will depend on their ability to retain an edge in geology and other important sciences in the oil business. And to do that, they have to be able to attract and retain the very best talent in the world and in the United States. And it's hard to do that if when people go home to their Thanksgiving table and say where they work, all their cousins suck in their breath or make them feel badly

about it. And also, they lose a lot of jury verdicts because they're so unpopular, they basically can't go to a jury trial without being guaranteed that they're starting out behind. And while they often just persist and overturn jury verdicts on appeal, it's not a great thing to be that unloved. Well, and as you said, I mean, this is a company full of some very smart people. I love that one of the exercises they undertake is sort of looking through history at the popularity of oil companies, because at some point, the idea is raised, hey, let's just find out when oil companies were popular and had good reputations, and maybe that'll serve as a blueprint for us. Right, exactly. And then they look at the history,

and they say, oh, well, it's hard to find an example of when the oil industry was popular. And, you know, we're all, that's because on the street, literally on the street in our cars when we go to fill up our gas tanks, we're confronted by a price of almost utility energy service that we don't have any control over. It's associated with a company that is a source of great concentrated power, and we're trapped in our cars. So it's sort of not surprising that Americans hold these big oil companies in suspicion. suspicion. They're kind of like a utility that isn't really accountable. And we can't, in the energy economy we have, escape our kind of customer relationship with them. We don't really have a choice. We were talking about sort of ExxonMobil and their own polling about gas prices affecting their own popularity. And certainly, they can't be alone in that regard.

I mean, I have to believe that the likes of Chevron and Royal Dutch Shell and BP, they're probably seeing the same thing. What do you think is the biggest misconception about the cost of gasoline? Well, probably in the public's mind, it would be natural to assume that these companies are in the retail gasoline business because it's a great moneymaker. And, you know, they make a few cents at the gas station. But the irony is that this is the least profitable part of their business, and the book describes a board meeting that ExxonMobil had in 2005 where Lee Raymond, as he was departing his long run as chief executive, basically said to the board, why don't we just get out of the retail gasoline business? it's the place where we make our customers miserable by associating our brand with high prices that we can't control a b we don't really make any money eighty percent or more of our profits come from the wellhead where you produce and sell oil wholesale in effect or from

the chemicals business they say why don't we just become like dupont and and take our signs down it's not as crazy crazy an idea as it sounds except these brands exxon and mobile are have a lot of value they have a lot of presence in american society and you can't just snuff them out because you don't like being unpopular. You're listening to Motley Fool Money, talking with Steve Cole, author of the new book, Private Empire, ExxonMobil and American Power. There are some fascinating characters in your book. And I say characters because obviously they're not fictional characters. These are real people, but they are larger than life characters. And one you've mentioned a couple

of times, Lee Raymond, who was the CEO at ExxonMobil until 2005, with maybe one of the greatest nicknames in the history of American business. How did Lee Raymond get the nickname Iron Ass? By being a hard character, basically. I mean, you know, he's the sort of man who a biographer loves because he's very comfortable in his own skin. He's a big character, but he's also not trying to hide from the world. He's very direct, and he's a lifelong friend, or most of his adult life, a friend of Dick Cheney and neighbors in Dallas when Cheney was running Halliburton. And they're similar characters, not really worried about their own personal popularity, but full of confidence and conviction about how the world should be organized. And in

his case, he basically was a very effective leader of a very large corporation, but also someone who bruised a lot of his colleagues and who was very blunt, especially when challenged or when he thought somebody had asked a stupid question, he would go after them, whether they were a Wall Street analyst or a journalist or a fellow manager. In private, he was, you know, quite a charming character. And he didn't go after people who were way down the food chain. He was polite to his, you know, corporate pilots and that sort of thing. But if you were an executive and you asked a question that he thought was dumb, man, he would just rip your head off. That was kind of the culture, because it was a lot of sort of Marine veterans and a sort of a military ethos still

that pervades the place, and you're just supposed to be able to take it. ExxonMobil CEO now is Rex Tillerson. How does he differ from Lee Raymond? Well, by 2005, I think the board of directors and other constituents of the company sort of felt like, well, Lee Raymond was a great leader, but he really drove us a little too hard, and he He damaged our reputation by some of his communications in public about climate, about which he was very, very skeptical that there was such a thing as climate change. And he kind of created a tone that ExxonMobil wanted to change in the next iteration. So on the one hand, they thought their business model was working great

and that the systems that Raymond had put in place were working great. They didn't want to change their model, but they wanted to change their tone. So they hired Rex Tillerson in part for that purpose. He came up from the ranks. But he's a more affable character. His father was an administrator in the Boy Scouts of America. He has a kind of Boy Scout ethos about him, and he communicates very well. So the idea was to put a different face and tell ExxonMobil's story a little more gently

and a little more inclusively than they've done before. Now, what does that get you in this world? It does get you something. The oil industry is heavily regulated. It's unpopular, as we've talked about. They need partners. They need partners in government. They need partners in business, and so it's not just about public relations.

Coming up, more with Pulitzer Prize-winning author Steve Cole. Stay right here. You're listening to Motley Fool Money. Welcome back to Motley Fool Money. Talking with Steve Cole, author of the new book, Private Empire, ExxonMobil, and American Power. ExxonMobil recently announced it's going to spend $185 billion over the next five years to find more oil and natural gas. And I want to focus on the natural gas piece of that. What are they betting on, and how is it working out so far? Well, in this world of constraints and limits, one of the paths forward is to shift their ownership of oil and gas toward gas,

because there's more of it coming online in the free market countries of the West where they're freest to operate and to own things without political complication. This is the rise of unconventional gas in the United States, so-called the gas that's extracted by fracking techniques. And they were not a player for most of the last 10 or 12 years. None of the supermajors really saw this coming, but they did what they have the capacity uniquely to do, which was once they saw it was here, they bought their way in.

They bought the largest producer of unconventional gas in the United States, XTO, in 2010. So now in the United States, ExxonMobil is the largest producer of unconventional natural gas. And they're making a big bet on that looking out over 30 or 40 years. Now, the problem may be that as low gas prices today reflect, producing gas may not prove to be as profitable on a per-unit basis as oil production has been, so that'll be a challenge. But they see themselves as a long-term player who can always extract extra value compared to their competitors, so they're really committed to this direction. One of their competitors in the natural gas space is Chesapeake Energy,

and obviously they're a company involved in fracking as well. I read a quote from an interview that you gave recently, and I don't have the exact quote in front of me, but it seemed my interpretation of your quote was that fracking is going to be a bigger PR challenge for ExxonMobil than the Valdez accident was. First, do I have that correctly? And second, if I do, why do you think that?

Well, I think whatever I might have said, I think I meant something along those lines. And basically, it's because already we can see that American communities and environmental groups and politicians and others are concerned about how fracking might damage American land or pose risks to drinking water supplies or induce earthquakes. And I think an honest reading of this emerging and very important and potentially, you know, very constructive, positive industry in the United States, an honest reading of it, it's in early days. There's a lot about these techniques that are not known. There are a lot of different operators who do it in different ways. Not everybody is ExxonMobil in terms of their commitment to high standards and operating discipline. And the regulatory scheme and the politics around that scheme is just starting to take shape. So if you want to have a pathway to a healthy industry in a country where our politics is so divided, nobody trusts anybody, you're going to have to be very skillful at your public relations and political strategy.

And I guess the question that I have looking out is whether ExxonMobil has the flexibility, the trust strategy, the communication skills to navigate this. They've made a huge investment in it as a business. Now they've got to win the politics, and I think that's going to be a challenge. I'm curious what, if any, parallels you see between ExxonMobil and Apple, because certainly when you look at Lee Raymond and Steve Jobs, and then you look at CEOs who came after them in Rex Tillerson and Tim Cook, There seems to be a parallel there in sort of a CEO who is appropriate for the times and is a bit of a departure from the one who came before. I'm also curious if you think that people at ExxonMobil got upset on some level when Apple surpassed ExxonMobil in market cap.

Yeah, I think that's an interesting observation about the CEOs and a good one. I hadn't thought of that before, but I have thought about the comparison more broadly. And it's interesting because they have similarities. They're both very closed systems. They're both very command management oriented in some respects. Neither of them has a reputation for being great partners. Both are very determined, and both, as you point out, have been led at times by very ambitious and hard-driving CEOs.

And yet they're also different in the sense that, you know, ExxonMobil is a very systems-driven collective in which individual creativity is really not cultivated. And at Apple, the opposite is true. And, you know, if you read the biography, the recent biography of Jobs, His passion for creativity and for individuals who could think in wide open ways comes through pretty strongly, and you wouldn't find much of that at ExxonMobil. But I'm sure ExxonMobil, yeah, they noticed when Apple passed them in stock market capitalization, and I'm sure they did not celebrate that moment. The interesting thing about ExxonMobil's size and durability is I went back and looked at the Fortune 500 lists all the way forward from the post-war period, 1950 on. They've always been in the top five. It's sort of sad to look back and see all the companies that have disappeared from that status, like U.S. Steel.

And if you think now Apple and ExxonMobil as number one and two, and you ask in 50 years which one's most likely to still be in the top five, I would not pick Apple. You're listening to Motley Fool Money, talking with Steve Cole. His new book is Private Empire, ExxonMobil, and American Power. What has been your biggest shift in thinking about the oil and gas industry since researching this book? Well, I think I knew that it was big and complicated, but I feel like I now understand just how intractable and embedded the fossil fuel economy is on a global basis. that the biggest reason why we as a society would want to move away from oil and gas is if we take the risk of global warming seriously,

because that risk is the main justification for imposing costs on ourselves now in order to get out of the energy economy we have. There's not a consensus about that. I actually have the view that the risks are serious in my reading of the science, and I would be willing to bear costs to make that transition. But the point is only, to make a transition away from an oil economy on a global basis, it's a huge undertaking. I mean, it is enormous.

And just thinking about the rising middle classes in China and India, their consumption of fuel just to drive their cars to the store, the way ordinary middle classes all around the world live the same lives, want the same washing machines, the way that energy economy is embedded means that it's going to be very difficult to change it. The book is Private Empire, ExxonMobil and American Power. It is a great read. It has got fascinating characters in it. Steve Cole, thanks for being here. Thank you, Chris. Thanks for having me.

Just in the minute before we wrap up the show this week, Columbia University is publishing a book next month, The Best Business Writing of 2012. Steve Brodell, Let me just tell you about a few of the people whose writing will be featured in this book. The Best Business Writing of 2012, Stephen Perlstein, Pulitzer Prize-winning business writer from The Washington Post, Warren Buffett. You've heard of him. Yes, I have. Our own colleague, Morgan Housel.

That's some nice company, isn't it? Absolutely. That's terrific news. So The Best Business Writing of 2012, Morgan Housel, Warren Buffett, Steve Perlstein. And honestly, that's a little bit of an honor for Buffett and Perlstein, too. I agree. Morgan's a great guy. You can check out Morgan's writing on fool.com.

You can also check out his latest e-book on Amazon. It's just 99 cents. It's called 50 Years in the Making, The Great Recession and Its Aftermath. That's by Morgan Housel on Amazon. It's an e-book for 99 cents. Just check it out. It's great stuff. That's it for this edition of Motley Fool Money.

Our engineer is Steve Broido. Our producer is Matt Greer. I'm Chris Hill. Thanks for listening. We'll see you next week. We'll be right back.