Big Oil's Record $199 Billion Profit Haul Faces Headwinds

Exxon Mobil Corp., Chevron Corp., Shell Plc, TotalEnergies SE and BP Plc all saw significant profits last year, totaling nearly $200 billion collectively. However, fears of an economic slowdown, plunging natural gas prices, cost inflation and uncertainty over China’s re-opening are dimming the outlook for 2023.

The five companies are expected to report $198.7 billion in combined profit for 2022, which would be 50% higher than the previous annual record set more than a decade ago, according to data compiled by Bloomberg. This would be an impressive feat and would likely solidify these companies as some of the most profitable in the world.

Analysts say that the influx of cash over the past 12 months means that the industry can afford to increase dividends and buy back shares. They note that management teams have been cautious about spending increases during this commodity boom, which is a marked contrast from previous cycles.

Instead of reinvesting in their business, Chevron decided to repay debt and increase investor returns. On Wednesday, the company announced a $75 billion stock repurchase plan, which is five times their current annual budget for buybacks.

According to a recent report, Big Oil's profits are expected to reach an all-time high in 2022. This is good news for the industry, which has been struggling in recent years. However, it is bad news for the environment, as the increased profits will likely lead to more oil exploration and drilling. This will have a negative impact on the planet, as it will lead to more greenhouse gas emissions.

"Commodity prices have fallen from their record highs in 2022, but it looks like it will still be a very strong year," said Kim Fustier, head of European oil and gas research at HSBC Holdings Plc. "It could very well be the second best year on record for overall distributions and share buybacks."

Fourth-quarter earnings are expected to be reduced by lower oil and gas prices. However, guidance from Exxon and Shell suggests that refining margins held up more than expected. Chevron is scheduled to kick off Big Oil earnings season at 6:15 a.m. New York time on Jan. 27.

The recent decline in energy prices may actually be beneficial for the global economy in the long run. Lower energy costs are helping to offset inflationary pressures, making it easier for central banks to keep interest rates low. This could help encourage economic growth and stability over the long term.

The world's largest oil companies are focused on returning profits to shareholders and keeping spending in check. This strategy has come under fire from politicians in Europe and the United States who want more oil production to bring down prices.

Big Oil is generating more excess cash per share than the average company in the S&P 500. This means that they are making more money than most other companies on the stock market.

Shares of the five supermajors have surged by at least 18% since Russia’s invasion, even though the price of crude has fallen by 11%. Last year, the top ten performers in the S&P 500 were all energy companies, with Exxon leading the pack with an impressive 80% gain – its best annual performance on record. Oil companies now generate around 10% of the index’s earnings, despite accounting for just 5% of its market value, according to data from Bloomberg.

Jeff Wyll, a senior analyst at Neuberger Berman Group LLC, which manages about $400 billion, said that investors are attracted to many of the characteristics that this sector has to offer now. He said that the sector has reinvented itself as a cash distribution and yield play, which is attractive in this current environment.

The oil majors' fortunes depend on whether they can keep their shareholder-return promises from last year. Those promises were made during the months-long run-up in commodity prices.

Noah Barrett, lead energy analyst at Janus Henderson, which manages about $275 billion, said that he expects energy companies to maintain their shareholder returns. He said that the base dividends are very safe at almost any oil price, and that the companies' balance sheets are in good shape. He expects them to continue buying back shares.

Investors are looking for executives to stick to the mantra of capital discipline. Over the last decade, excessive spending has eroded shareholder returns and left the sector vulnerable to oil crashes in 2016 and 2020.

Wyll noted that there is still a general aversion to large increases in capital expenditure. He explained that the problem the sector got into in the past was undertaking too many megaprojects at once. Now, he said, the sector is much more focused.

So far, it appears that discipline is holding. Exxon and Chevron both raised spending targets for this year, but the increases were driven largely by inflation rather than ramping up long-term growth projects. Despite a 500% increase in oil prices from early 2020 to mid-2022, global oil and gas capital spending fell in real terms, Goldman Sachs Group Inc. said in a Jan. 9 note.

As earnings season gets underway, one key question for executives is how much they’re setting aside for European windfall-profit taxes. Exxon has estimated a $2 billion charge, but is pursuing legal action. Shell says its 2022 bill could total $2.4 billion.

Earlier this month, Exxon announced that its fourth-quarter earnings had taken a hit of around $3.7 billion due to weaker oil and gas prices. However, analysts noted that refining margins were much stronger than expected. The US oil giant will report its full results on Jan. 31.

Shell, whose newly-appointed Chief Executive Officer Wael Sawan will host his first earnings call, also noted stronger refining and pointed to a rebound in gas trading. In a Jan. 17 statement, TotalEnergies pointed to similar trends.