It’s been another record-breaking quarter for big oil. The likes of ExxonMobil and BP have capitalized on exceptional global circumstances. Rather than investing in their transition, these companies have persisted with increasing payouts to shareholders that remained loyal through a wobbly few years. But this strategy will likely see 2022 as the year that ‘big oil’ topped out for the final time.
Russia’s ongoing invasion of Ukraine has held oil prices at levels never sustained before; costs have driven inflation in Europe to rates not seen for decades. Throughout the quarter Brent crude oil futures traded at an average of around $114 per barrel – up from $69 per barrel in Q2 2022 – boosted by a slow return of output from OPEC+, as well as labor shortages in many producing markets.
ExxonMobil and Chevron, the two largest US majors, posted their results on Friday last week, and nearly tripled their profits from a year before. Exxon managed to surpass analyst expectations to secure a Q2 net profit of $17.9 billion, marking its best quarterly result since 2012, when oil prices saw a similar spike. Chevron beat expectations by a similar amount: $11.6 billion for the quarter.
The story is much the same across the pond. Shell, reporting its results on Thursday, announced its second consecutive record quarter, with earnings of $11.5 billion. France’s TotalEnergies pulled in $9.8 billion, again tripling income from 2021 levels. Italy’s Eni increased profits four-fold to €3.81 billion. BP’s profits of $8.5 billion marked its highest in 14 years.
Having trimmed down their break-even price for oil production during the heights of Covid-19, when oil prices at times dipped into the negative, it is the downstream refining businesses that are driving these profits. The margin between the reduced cost of production and the soaring market prices for crude oil has pushed beyond 60% in some places.
The value of oil and gas stocks has now more than quadrupled since they bottomed out in 2020. ExxonMobil and Chevron hit all-time highs in their share price over the past month. European majors, in a market that is less bullish on long-term oil demand, have seen prices returning to around their pre-pandemic levels.
Such confidence in the market has given a swagger back to their step. Previous discussions of transition to clean energy have been muted by new plans to secure more oil supply, while keeping investors sweet with generous payouts and share buybacks.
ExxonMobil, for example, is pushing production growth in the Permian Basin shale oil and gas fields in Texas and New Mexico, which it has increased by 130,000 barrels per day since the first half of 2021. It expects to increase the capacity of a Beaumont, Texas, refinery by about 250,000 barrels per day early next year.
In a similar vein, Saudi Aramco has made a move to acquire the global products division of US motor oil and lubricants group Valvoline for $2.65 billion, in a bid to bolster its downstream business.
Doubling down on oil may help prop-up balance sheets for the next few years, but this is not a strategy that will protect these companies from the downturn that will come thereafter.
There are already signs that oil may have topped out. The reality of a global recession, with consumers being squeezed by inflation, has seen oil prices fall by around 11% from their Q2 peaks. The outlook for oil majors will also be weakened by rising interest rates, which are being used to try and combat this inflation.
With Climate Change moving towards the front and center of western politics, the profiteering of big oil is facing more and more pressure. The UK has already passed a 25% windfall tax on oil and gas producers in the North Sea, while US lawmakers have proposed a similar idea. BP, which is particularly exposed to the UK market, has seen the weakest recovery in its stock price among its compatriots. Companies will also face increased costs and oil service companies pass on their increased operating expenses.
Both dynamics will only accelerate the downturn in global oil demand. While many of these oil majors are banking on increased demand to justify their increase in production, Rethink Energy – as well as any other analyst group that is worth its weight – expects that global demand peaked in 2019, before the Covid-19 pandemic, and will begin to plumet from 2024 onwards, as EVs storm the automotive market.
For the next two to three years, the boycott of Russian oil will limit how low oil prices can fall, and big oil will remain profitable. Beyond this, their entire existence will depend on how they are investing today.
Currently their investment, across all sectors, is minimal. Chevron and Exxon invested a combined $8.5 billion over Q2, with the vast majority of this going towards new oil and gas.
Largely, their Russian-induced nest-egg is being used to fund buyback programs – ExxonMobil with the most aggressive – and hiked dividends, which aim to prop up their share price.
Chevron boosted its annual buyback plans to a range of $10 billion to $15 billion, up from $5 billion to $10 billion. ExxonMobil aims to buyback $30 billion of shares through 2022 and 2023, while Shell said it would buy back $6 billion in shares in Q3, after buying $8.5 billion in the first half of the year. Returning nearly $7 billion in Q2, around $5 billion of Shell’s shareholder returns can be attributed to its buyback program, with the rest coming from dividends.
In total, the combined shareholder returns of ExxonMobil, Chevron, Total, BP and Shell amount to nearly $30 billion over the past three months – nearly doubling their total capital investment and dwarfing their investment in renewable energy.
Big Oil is confused over how to win new investors through radical reform to its business – the last thing it wants is to scare off existing investors that are ‘sure’ that oil will be with us through to 2050 (it won’t). They are now almost rebranding as a financial instrument, pulling in new investors through reduced spending, slashed debt, but with solid and consistent payouts.
This will make buying back shares more expensive, especially given the premium that the company will have to pay. Investor confidence will rise, but not if the companies fail to build a business that they can sustainably operate and grow through the energy transition.