Big oil hit headwinds after record $199 billion profit


(Bloomberg) — Exxon Mobil Corp., Chevron Corp., Shell Plc, TotalEnergies SE and BP Plc made almost $200 billion last year but fear an economic downturn, falling natural gas prices, cost inflation and uncertainty about China reopening . cloud the outlook for 2023.

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In the coming days, the five companies are expected to report a combined profit of $198.7 billion in 2022, up 50% from the previous annual record set more than a decade ago, according to data compiled by Bloomberg.

The tsunami of cash generated by the group over the past 12 months means the industry can support dividend increases and share buybacks, analysts said. Of particular importance to shareholders, management teams have refrained from increasing spending as commodity prices rose, in stark contrast to previous cycles.

Instead, they decided to pay off the debt and boost investor returns: Chevron stunned shareholders on Wednesday by announcing a $75 billion share buyback, five times the company’s current annual buyout costs.

“Commodity prices are down across the board from record levels in 2022, but it still looks like it will be a very good year,” said Kim Fustier, head of oil and gas exploration in Europe at HSBC Holdings Plc. “This year could very well be the second-best year ever for general distributions and share repurchases.”

Earnings in the fourth quarter, although one of the highest on record, are likely to decrease due to lower oil and gas prices. Refining margins rose more than expected, according to Exxon and Shell forecasts. Chevron plans to start the major oil reporting season at 6:15 am New York time on January 27th.

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While the fall in energy prices has been sharp – oil and gas are now lower than when Russia invaded Ukraine in late February – this could help put the global economy and energy companies on a more sustainable trajectory in the long term. Lower energy costs help partly ease inflation by easing pressure on central banks to keep raising interest rates.

Across the board, major oil explorers are focused on returning record profits to shareholders while maintaining cost control. This strategy has provoked political attacks from Brussels to Washington, DC, from politicians who want to increase supply to drive down prices.

Shares in the top five companies have risen at least 18% since the Russian invasion, despite an 11% drop in oil prices. The S&P 500 top 10 last year included all utilities, with Exxon advancing 80%, posting the best annual performance on record. According to data compiled by Bloomberg, oil companies currently generate about 10% of the index’s gains, despite only accounting for 5% of its market value.

“Investors are attracted to the many characteristics this sector has to offer now,” said Geoff Will, senior analyst at Neuberger Berman Group LLC, which manages approximately $400 billion. “It tried to be a growth sector and it failed. It has reinvented itself as a cash distribution and yield game that is attractive in this environment.”

The key to the big oil companies’ success is whether they can meet the shareholder commitments made last year during months of commodity price increases.

“I expect them to keep those shareholder returns,” said Noah Barrett, lead energy analyst at Janus Henderson, which manages roughly $275 billion. “The underlying dividend is incredibly safe at almost any oil price, balance sheets are in good shape and I expect them to continue to buy back shares.”

Investors are also interested in seeing executives stick to the mantra of capital discipline. It was the huge increase in spending over most of the last decade that drove down shareholder returns and made the sector vulnerable to the oil crises in 2016 and 2020.

“There is still an aversion to massive increases in capital expenditures, period,” Will said. “The problem that this sector has faced in the past is that there are too many mega-projects running at the same time. Now he is much more focused.”

So far this discipline seems to be holding. Exxon and Chevron have raised their spending targets for this year, but the increase was driven mostly by inflation rather than building up long-term growth projects. Despite a 500 percent rise in oil prices from early 2020 to mid-2022, global oil and gas capital spending has declined in real terms, Goldman Sachs Group Inc. said in a statement. dated January 9th.

One of the biggest questions for executives this reporting season is how much they set aside for European windfall taxes. Exxon has valued the charge at $2 billion but is suing. Shell says its 2022 bill could be $2.4 billion.

Earlier this month, Exxon said fourth-quarter profits were hurt by about $3.7 billion due to lower oil and gas prices compared to the previous quarter, but analysts said refining margins were much higher than expected. This is reported on January 31 by the American oil giant.

Shell, whose newly appointed chief executive officer Wael Savan will hold his first earnings call, also noted increased refining and pointed to a recovery in gas trade. TotalEnergies pointed to similar trends in a January 17 statement.

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