Oil companies will shrug off the gloom that has blanketed many other industries when they start reporting earnings this week, with analysts forecasting tens of billions of dollars in quarterly profits.
But the outlook is bleaker for the coming year: preliminary projections compiled by S&P Capital IQ have the five western oil supermajors collectively earning $150bn in 2023, down from roughly $200bn in 2022.
The decline in cash machine oil producers comes after energy prices retreated from last year’s highs following Russia’s full-scale invasion of Ukraine. But even if annual profits fall by $50bn, the company will still have the second-highest revenue on record.
US major Chevron kicks off Big Oil’s earnings season on Friday, followed by ExxonMobil next Tuesday and Europe-based Shell, BP and TotalEnergies in early February.
The five companies’ combined profits for the last three months of 2022 are expected to be $41.8bn, up more than 40 per cent from $29.4bn a year earlier, according to S&P Capital IQ.
However, its earnings will fall 18 percent from the third quarter. Exxon signaled in a regulatory filing this month that low commodity prices would cut fourth-quarter earnings to $4.1bn from a record $19.7bn in the third quarter. That danger still makes Exxon one of the most profitable places.
Sajjad Alam, an analyst at Moody’s, said last year’s big cash infusion put the sector “in the best place I’ve seen in the last 15 years. They will have a lot of flexibility in how to use record levels of cash flow.”
Reflecting this strength, Chevron on Wednesday announced it would buy back $75bn of stock over an unspecified number of years.
The government’s increased focus on energy security after the invasion of Ukraine has brought back some investors who shunned fossil fuel producers because of climate-damaging emissions, analysts say.
In the market “the peak of ESG concerns has disappeared”, said Matt Portillo, analyst at the Texas-based investment bank TPH, referring to environmental, social and governance investments. As investors shift focus back to the company’s core oil and gas business, it has been “constructive for equities,” said Portillo.
Oil and gas stocks led Wall Street’s benchmark S&P 500 last year for the second year in a row, rising about 40 percent compared to the index’s 14 percent decline. Fourth-quarter earnings of companies in the S&P energy sub-index are expected to be 56 percent higher year over year, while earnings in the index are expected to fall 6 percent, according to Credit Suisse.
Shares of the US oil supermajor have outperformed their European rivals, which are facing investor questions about a planned pivot away from fossil fuels. However, European companies are expected to report an increase in fourth quarter profits compared to 2021.
US shale oil and gas producers, led by companies such as Pioneer Natural Resources, Devon Energy and Occidental Petroleum, have experienced a remarkable economic recovery, turning around the amount of free cash flow after more than a decade of dismal returns.
Rystad Energy, a consultant, expects the shale sector to generate around $120bn in free cash flow, or money left over after operating and capital costs, in 2023. That would be down from $156bn last year but a reversal from the year when spending exceeded it. fortunate.
Shale companies have shifted from using cash to fund aggressive new drilling campaigns to handing the lion’s share to shareholders through dividends and share buybacks.
This also led to production growth and helped boost oil prices. Analysts will be watching shale companies’ drilling plans this earnings season for signs of a renewed focus on growth.
“Drill, baby, drill is still in the DNA of the industry. . . but now they understand that non-stop growth is no longer in the company’s interest, and I think it will stay that way,” said Matthew Bernstein, an analyst at Rystad.
US President Joe Biden has slammed big spending on dividends and buybacks at a time when prices are high for consumers, calling them unacceptable “at war”.
But analysts do not expect political pressure to derail the company’s strategy and said pressure can now ease after the election last November and retreat from record high prices at the fuel pump.
“There is a lot of hand-waving in the political arena, but at the end of the day the company will do right by the shareholders,” said Portillo.
Fossil fuel producers could also benefit from rising oil and gas prices this year as analysts warn that energy supplies remain tight.
Goldman Sachs is one of the Wall Street banks that expects crude oil prices to climb back above $100 a barrel by the end of this year as China siphons more fuel to reopen its economy, after lifting strict Covid-19 policies and sanctions west consider. in Russian output.
But the prospect of an economic slowdown continues to hang over the sector, with some oil executives denying that a downturn is imminent.
Chevron chief executive Mike Wirth told the World Economic Forum in Davos last week that “it’s likely we’ll see a recession this year”, pointing to the drop in commodity prices in recent months as a sign of “the economy slowing down”.