Oil Drillers Profits Soar: Don’t Expect any Relief at Pump

February 6, 2023

Houston Chronicle:

Exxon Mobil: $55.7 billionShell: $42.3 billionChevron: $35.5 billionConocoPhillips: $18.7 billion. As expected, oil companies are reporting blockbuster profits for 2022.

But directing those profits in a way that shields consumers from chaotic price changes is unlikely, industry analysts said. Instead, consumers should brace for large fluctuations in energy prices for years to come.

“You’re going to get these wild swings over the next 15 years,” said Ramanan Krishnamoorti, chief energy officer at the University of Houston. “Find ways to protect yourself – don’t go buy an F-150 just because you see gas prices at $1 and then go buy a hybrid when it goes to $5.”

Already used to up and down cycles, the oil and gas industry has had a particularly volatile few years. As the industry was recovering from last decade’s shale bust it got hit by the pandemic downturn – two downturns that acounted for hundreds of bankruptcies and billions of dollars in losses. 

As fuel demand recovered coming out of the depths of the pandemic and oil prices rose, companies remained cautious about spending to ramp up production. Increased oil supply brings down prices – good news for consumers, but havoc for a company’s earnings – and investors, burned by overspending in previous years, have demanded disciplined spending and higher returns. 

“(Companies) are not necessarily investing massively into oil and gas future exploration and production,” Krishnamoorti said. “This very sharp volatility – rapid rises, rapid falls of price – is going to be dependent on the fact that this is an undercapitalized market at this point, and the risk associated with capitalization is very high.” 

Krishnamoorti said the companies that are spending on exploration and production are looking for short-term boosts in production such as adding on to existing projects, rather than making long-term capital investments. On top of that, some analysts say oil and gas companies are not investing enough to meaningfully pivot away from fossil fuels to cleaner forms of energy, which after initial development and building costs can be cheaper for consumers in the long run. 

5 year graph of US Natural gas prices below:

Still, some investors say after years of mismanagement, they’re happy with how companies are handling their cash. Cole Smead helps manage about $5.2 billion worth of investments for Phoenix-based Smead Capital Management. He said they didn’t own energy stock for nearly a decade, but in 2019 bought shares of Occidental Petroleum, followed by ConocoPhillips and Chevron. 

“The circumstances that have kicked off now are just nothing short of remarkable,” Smead said, referencing the capital discipline that’s allowed companies to take advantage of high prices. “They’re incredible. They’re things that people never said could happen.” 

In an effort to keep investors happy, companies have announced share buyback programs, which drive stock prices higher. Chevron told investors it would spend $75 billion in the coming years on buybacks, and in December Exxon said it would spend $50 billion to repurchase shares. Meanwhile, Chevron’s stock price rose nearly 26 percent over the past year, while Exxon’s is up nearly 40 percent. The S&P 500 is down more than 6.5 percent in the same period.

The big profits, however, are renewing calls for a windfall tax on oil and gas companies, similar to the one approved by the European Union in September. Industry opposes the move, saying it inhibits production, and Exxon has sued the EU over the plan. President Joe Biden, however, has floated the idea, and critics of Big Oil’s earnings say the tax could help curtail costs for families. 

“Big Oil is rolling in cash while families are struggling to heat their homes or fill their gas tanks,” Jamie Henn, spokesperson for an anti-Big Oil grassroots advocacy group called Stop the Oil Profiteering, said in a statement. “If Chevron has $75 billion to lavish on its wealthy shareholders and CEO, then it can certainly afford a windfall profits tax to provide much needed relief to hard working Americans.” 

The American Petroleum Institute, a trade and lobbying group for the oil and gas industry, argues that windfall taxes leads to lower domestic production and increases reliance on imported oil and gas. 

“Increasing taxes on American energy discourages investment in new production, which is the exact opposite of what is needed,” Mike Sommers, president of the American Petroleum Institute, said in a October statement in response to Biden’s critique of the industry’s massive third quarter earnings. “American families and businesses are looking to lawmakers for solutions, not campaign rhetoric.”

The oil and gas industry is roughly halfway through reporting full year 2022 earnings, and some of Houston’s most well known companies are expected to add to the bonanza. Marathon Oil reports on Feb. 15, EOG resources on Feb. 24 and Occidental Petroleum on Feb. 28. 


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