Tag: Oil and Gas

ExxonMobil, Chevron’s big cash shows cheap gas isn’t coming back

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If you want a quick outlook on whether U.S. gas prices are likely to return to pre-Covid levels, a good place to start is earnings reports from Chevron and Exxon in the last week.

The outlook: Don’t count on it. In their fourth-quarter earnings reports, both companies showed clear signs of Big Oil’s renewed focus on managing costs, widening profit margins as oil prices stayed relatively high even after coming down considerably from last year’s highs, and confidence that they will be able to keep passing the rewards back to shareholders.

On Jan. 25, Chevron announced a $75 billion share buyback, which will allow it to use excess cash flow to cut the number of shares by up to as much as 20% — over multiple years and contingent on shares also used for employee options programs and M&A rather than just earnings per share increase. Chevron also raised its dividend to about 3.4%, double that of the Standard & Poor’s 500-stock index. On Jan. 31, Exxon announced it had spent $15.2 billion to acquire stock in 2022 – up from $155 million a year earlier, and authorized another $35 billion this year and next.

The moves are the latest page in the industry’s post-2020 playbook: To satisfy investors who pushed energy stocks down more than 40% in a rising stock market between 2014 and 2019, oil companies slowed down drilling overinvestment that had caused cash-flow losses estimated as high as $280 billion. With the conserved cash, they raised dividends and boosted stock buybacks – moves that helped oil stocks double in the year after the 2020 election, as U.S. gasoline prices rose by more than half.

Rob Thummel, senior portfolio manager at Tortoise Capital Advisors, which advises mutual funds on energy investing, said Chevron and Exxon are in position to increase the dividend, increase production, and buy back stock. “They are doing what mature companies do – generate a lot of cash and return it to shareholders,” he said.

Big oil sees political pushback on buybacks

Fuel prices at a Chevron gas station in Menlo Park, California, on Thursday, June 9, 2022.

David Paul Morris | Bloomberg | Getty Images

The industry’s reallocation of money to shareholders from new drilling comes as political leaders, including President Joe Biden, criticize oil companies for not restraining the price of gasoline as crude oil rose from $53 when Biden took office in 2021 to $77.50 now.  Exxon’s fourth-quarter profit margin of almost 14% of revenue compares to 11% a year ago.

“My message to the American energy companies is this: You should not be using your profits to buy back stock or for dividends,” Biden said in October. “Not now. Not while a war is raging. You should be using these record-breaking profits to increase production and refining.”

The White House attacked both companies again this week after the buyback announcements.

In the market, and at the oil companies headquarters, it seems the opinions issued from the White House aren’t much of a factor in setting financial priorities. The price of oil is set on world markets, rather than by individual producers, Thummel said. The role of the Organization of Petroleum Exporting Countries, led by Saudi Arabia, in limiting production is the biggest factor in world prices. U.S. oil production, which does not have a central organization setting prices, has rebounded from a post-Covid low reached in April 2021, and reached 383 million barrels per month in October, closing in on the all-time high of 402 million in December 2019, according to U.S. government data.

Gas prices are also being hit by a loss of refining capacity. Part of this is longer-term, as refiners phased out less profitable facilities during the Covid-related demand drop, and following a wave of mergers forced by declining cash flow and share prices. And part of it stems from temporary shutdowns for maintenance made necessary by the cold wave in much of the country in December, CFRA Research analyst Stewart Glickman said.

Of the two biggest U.S. oil producers, Chevron made the more dramatic changes in the fourth quarter earnings releases, since Exxon had announced its buyback acceleration earlier, Glickman said.

The benchmark now is to spend roughly a third of operating cash flow on capital investment, a third on dividends and a third on stock buybacks. The buybacks can be dialed back if oil prices fall, and would likely be the first big cost cut oil producers would make if crude fell back to $60 a barrel from the current range about $77, he said. Buybacks, unlike dividends, aren’t treated as a “must” by investors each quarter, while cutting a dividend can lead to mass selling by investors.

Chevron is pretty close to Glickman’s recipe, with $49.6 billion of 2022 cash flow yielding $11 billion in dividend payments, $11.3 billion in share buybacks that were accelerating as the year ended to the $15 billion annual pace, and $12 billion in capital investment – enough to boost U.S. production by about 4% even as its international production dropped. Exxon made $76.8 billion in operating cash flow, invested $18 billion back into the business, spent $14.9 billion on dividends and $15.2 billion in stock purchases, according to its cash flow statement.

“What we learned from [earnings announcements] is that the industry is very committed to a conservative approach to spending,” Glickman said. “They could [drill more], but they would have to sacrifice their return thresholds, and neither they nor their shareholders are interested. I don’t blame them.”

Oil production is increasing

Despite the push to pay out more money, the companies have begun to produce slightly more oil in the U.S.

Chevron said its U.S. oil production gain was led by a double-digit increase in the Permian Basin of Texas. Exxon also said Permian production led its U.S. results, rising by nearly 90,000 barrels per day.

“Growth matters when it’s profitable,” Chevron CEO Mike Wirth said on the company’s earnings call on Jan. 27. Chief Financial Officer Pierre Breber said the company’s four major financial goals are dividend growth, buyback growth, capital spending and reducing debt.

Slower growth and cash distribution is the right path for an industry that is growing more slowly, Thummel said, especially since the government is prodding utilities away from relying on natural gas to make electricity and offering consumers tax credits to swap gasoline-powered cars and SUVs for electric models. 

In the early part of the last decade, investors applauded energy companies for investing more than their entire operating profit in new wells, believing that hydraulic fracking would propel the sector to a new wave of growth, Glickman said. And while U.S. production more than doubled during the fracking boom, it failed to produce the expected profit. Today, politicians are trying to foster a transition away from fossil fuels, making it dicey for Big Oil to invest in large offshore drilling plans that may need decades to pay off, he added.

“Why on earth would these companies agree to play ball with that kind of attitude?” he said.

The oil companies’ new approach stands in sharp contrast to that of EV maker Tesla, which has resisted shareholder pressure to begin buying back stock as it begins taking share in a market entwined with the oil companies. Tesla has hung on to its cash flow even as it completes a major factory-building campaign that has seen it add new plants in Texas, China, and Germany to its initial production facility in California. The company also produces batteries for its vehicles in Nevada.

That path works for Tesla because it is addressing a fast-growing market for EVs, while oil companies are trying to milk the cash from their existing, low-growth businesses and invest in new ones like carbon capture before current sources of cash flow like gasoline sales begin to shrink, Glickman said. But even Tesla should be returning cash to holders after a sharp decline in shares last year, Wedbush analyst Dan Ives said.

“Our view is that it’s a no-brainer that Tesla should do a buyback now,” Ives said. “Tesla is in a robust position financially and this would send an important signal. The biggest capital spending is in the rearview mirror for now.” 

But Tesla’s most obvious short-term use of its $22 billion cash hoard might be preparing for any possible impact on profits of the price cuts it announced Jan. 13. 

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Norway’s fossil fuel bonanza stokes impassioned debate about how best to spend its ‘war profits’

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Norway is making more money from oil and gas exports than ever.

Ole Berg-rusten | Afp | Getty Images

Norway’s skyrocketing oil and gas wealth is expected to climb to new heights this year, boosted by higher fossil fuel prices in the wake of Russia’s nearly year-long onslaught in Ukraine.

The ballooning petroleum profits of the Scandinavian country put Oslo in a unique position: As many in Europe are struggling to cope with the region’s worst energy crisis in decades, Norway — already extremely rich — is getting richer still.

It has ignited an impassioned debate about international justice, with many questioning whether it is fair for Norway to rake in record oil and gas revenues at the expense of others’ misfortune.

Opposition lawmakers, prominent economists in the country, and even titans of Norway’s energy industry have called on the government to set an example to the world by pumping its fossil fuel revenues into a new international solidarity fund that helps countries meet their climate goals.

Norway’s Finance Ministry expects the state’s revenues from oil and gas sales to climb to 1.38 trillion Norwegian krone ($131 billion) this year. That’s up from a previous record of 1.17 trillion krone last year, and a nearly fivefold increase from 288 billion krone in 2021.

“They are war profits,” Lars-Henrik Paarup Michelsen, director of the Norwegian Climate Foundation think tank, told CNBC via telephone.

“Most European countries are getting poorer because of the war. Norway is getting richer — much richer.”

Opposition lawmakers, prominent economists and even titans of Norway’s energy industry have called on Prime Minister Jonas Gahr Store’s government to set an example to the world by pumping at least some of its fossil fuel revenues into a new international solidarity fund.

Picture Alliance | Picture Alliance | Getty Images

Michelsen said he was fearful that by choosing to pocket its bumper oil and gas profits, Norway is damaging its international reputation, warning that the country is at risk of being perceived as “very egocentric.”

“We are in a completely different position than the rest of Europe and I think, with that, it also bears a responsibility,” Michelsen said. He called for the government to redirect its extraordinary windfall to further help Ukraine, accelerate Europe’s energy transition and provide climate finance for low-income countries.

“This situation is certainly not of our making and not to our liking,” Norway’s Deputy Foreign Minister Eivind Vad Petersson told CNBC via telephone. He argued that it is critically important for Europe’s energy security that Norway keeps gas production high.

Petersson said the government’s financial support to Ukraine is approaching 1.5 billion euros ($1.63 billion), adding that the country’s policymakers are working on a multi-year program to continue to help Kyiv.

Oil companies are getting richer and richer, but we don’t see that money — and who is really paying for this?

Ingrid Fiskaa

Foreign affairs spokesperson for Norway’s Socialist Left

When asked about accusations that the country is war profiteering, Petersson replied, “No, not really … The indirect effect, we fully acknowledge, is that our revenues have increased, but I do not accept that label.”

“We are very well aware of the responsibility that comes with the fact that we have these resources. Of course, the responsibility to protect it, bearing in mind the crucial role of energy security now in Europe for this winter and possibly next,” Petersson said.

He added that Norway’s government is also “fully aware of the responsibility that comes with being a supporter and donor, not only to Ukraine but also other countries across the world suffering the effects of Russia’s war.”

‘We should contribute more with this money’

Norway, which last year overtook Russia as Europe’s biggest natural gas supplier, has been one of the world’s top crude producers for the past half-century. That’s thanks to its gigantic North Sea petroleum deposits — the spoils of which have been used to provide a robust safety net for current and future generations.

The Norwegian government’s net cash flow from petroleum sales is transferred into Norway’s $1.3 trillion sovereign wealth fund. The government can only spend a small part of the fund each year, but this is still estimated to amount to nearly 20% of the government budget.

The so-called Government Pension Fund Global, among the world’s largest sovereign wealth funds, was established in the 1990s to invest the surplus revenues of Norway’s oil and gas sector. To date, the fund has invested in more than 9,300 companies in 70 countries around the world.

Norway, which last year overtook Russia as Europe’s biggest gas supplier, has been one of the world’s top crude producers for the past half-century.

Jp Black | Lightrocket | Getty Images

“These excess profits, as we may call it, are a direct result of the war,” said Ingrid Fiskaa, foreign affairs spokesperson for Norway’s Socialist Left, whose support is critical for Prime Minister Jonas Gahr Store’s minority government.

Fiskaa highlighted that legislation in Norway limits the use of oil revenues in the domestic economy to avoid high inflation — and that, she argues, strengthens the case for investing in international solidarity.

“There should be a lot more debate on this issue,” Fiskaa told CNBC via telephone. “Oil companies are getting richer and richer, but we don’t see that money — and who is really paying for this? It is the rest of the world. We should contribute more with this money.”

Norway’s aid budget has hovered near 1% of its gross national income for more than a decade, making it one of the world’s most generous donors.

Store’s government was sharply criticized last year for proposing to cut the proportion of GNI it spends on foreign aid to 0.75%. That level is still significantly above the Organization for Economic Cooperation and Development’s average of 0.3%, but civil society groups described the move as “embarrassing” at a time when Oslo was making money like never before.

Norway’s foreign ministry has since pledged to deliver on its aid budget target of 1% of GNI in 2023.



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Oil expected to stay volatile in 2023, but the price could depend on China reopening

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Defying forecasts, crude oil prices have wiped out most of this year’s gains and could head lower

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Tom Kaye of Plymouth, Pennsylvania tops off his neighbor’s gas tank for them on at a gas station in Wilkes-Barre, Pennsylvania, U.S. October 19, 2022. 

Aimee Dilger | Reuters

Oil prices are defying expectations and are barely higher on the year, as the outlook for oil demand continues to deteriorate for now.

West Texas Intermediate crude futures for January settled higher Monday at $77.24 per barrel, following a drop to $73.60 per barrel, the lowest price since last December. WTI was up 2.2% for the year, after briefly turning negative earlier Monday.

Gasoline prices at the pump have also been falling dramatically and could be cheaper than last year for many Americans by Christmas, according to an outlook from the Oil Price Information Service. On Monday, the national average was $3.546 per gallon of regular unleaded fuel, down from $3.662 a week ago but still higher than the $3.394 a year ago, according to AAA.

‘Macro headwinds rather than tailwinds’

China’s lockdowns and the rare protests against Beijing this weekend have raised more doubt about the outlook for the country’s already weakened economy.

“We think the recessionary [forces] around the world, particularly in the three largest economies, are dominating the macro environment for the year as a whole, and we think that the issues we’ve been identifying as relatively bumpy in the period ahead are going to remain,” said Ed Morse, global head of commodities research at Citigroup. “Right now, we are looking at macro headwinds rather than tailwinds.”

Morse was one of the more bearish strategists on Wall Street in 2022, but he said the latest market developments and the hit to major economies made even his forecast too bullish. He had revised his outlook higher at the end of the third quarter, based on the shift by OPEC+ to focus on prices and the pending ban of Russian crude by Europe.

The oil market has been focused on those two potential catalysts for higher prices, but the impact on demand from the slowdown in China and new lockdowns has outweighed concerns about supply for now. The European Union’s ban on purchases of seaborne Russian oil takes place Dec. 5. The EU is also expected to announce price caps for Russian crude.

OPEC+ is also a factor. The group includes OPEC, plus other producers, including Russia. The group surprised the market in October when it approved a production cut of 2 million barrels a day.

“We’re waiting to see if they signal even deeper cuts. There were rumors in the market about that happening,” said John Kilduff, partner with Again Capital. After dipping to the day’s lows, oil rebounded on Monday as speculation circulated about new OPEC+ cuts, he said.

Brent futures, the international benchmark, was lower Monday afternoon at $83.19 per barrel, recovering from $80.61 per barrel, the lowest price since January.

“Right now the target is below $60 [for WTI]. That’s what the chart is indicating… this is a new low for the move because previously the low for the year was late September and now we’ve broken that,” said Kilduff. “It all depends on what happens in China. China is as important on the demand side, as OPEC+ is on the supply side.”

Higher oil prices next year?

Analysts expect oil prices to increase next year. JPMorgan predicts Brent will average $90 per barrel in 2023.

Morgan Stanley expects the return of much higher prices mid-year, after China ends lockdowns.

“Our balances point to modest oversupply in coming months. Hence, we see Brent prices range-bound in the mid-80s to high-90s first,” the firm’s analysts wrote. “However, the market will likely return to balance in 2Q23 and undersupply in 2H23. With limited supply buffer, we expect Brent to return to ~$110/bbl by the middle of next year.”

Kilduff said he does not expect OPEC+ to make a big market impact this year with its cuts, though it is a wild card. Another factor that could drive prices would be if the war in Ukraine were to escalate.

“I’m not that worried about an OPEC+ cut just because the reality of it is most of the countries aren’t going to be cutting. It’s only going to be Saudi Arabia dialing back on the edges,” he said. “Everyone is so far into their quota. It’s a numbers game.”

Morse said market dynamics have changed and oil demand growth will be smaller as a percentage of gross domestic product. “We’re seeing a significant slowdown in global growth,” he said.

Oil demand growth for China turned out to be much less than expected. “We were thinking demand was sluggish. It turned out to be significantly more sluggish… We had thought this year was going to see 3.4 million barrels of demand growth. It actually grew by 1.7 million barrels,” Morse said. He noted that Europe’s demand is down by several hundred thousand barrels, and the U.S. was flat in 2022.

Morse said the demand decline is also part of bigger trend, tied in part to the energy transition toward renewables. “We are also looking for the peak of oil demand in this decade. It’s part of a longer term story,” he said.

The weather’s influence

Kilduff said La Niña’s weather pattern has also affected prices, with warmer weather in North America. He and other analysts say it could continue to impact the market.

“We keep getting cold outlooks, and then it falters. This is La Niña. You will get cold days, but then you get balmy stretches,” Kilduff said. He said concerns about winter heating fuel supplies have abated with a build in supplies in Europe.

The result for consumers could be a windfall at the pump during the holiday season. OPIS expects prices to keep falling into January before turning higher again.

“If you combine the Chinese demonstrations with the warm weather in the northern hemisphere, that’s kind of a double-barreled assault on the energy price at the moment,” said Tom Kloza, global energy analyst at OPIS. He said he expects gasoline to average between $3 and $3.25 per gallon at its low, but it will be below $3 in many parts of the country.

Kloza said by Christmas, the U.S. national average should be slightly below the $3.28 level it was at last year.

Diesel prices have also been falling. According to AAA, diesel averaged $5.215 per gallon nationally Monday, off by about 8 cents per gallon from a week ago.

“We’ve been counter-seasonally building distillate fuel supply so that’s been easing things. If the weather stays relatively benign here, we’re going to lose that upside catalyst and grind lower still,” said Again’s Kilduff.

–Michael Bloom contributed to this story.

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The big new Exxon Mobil climate change deal that got an assist from Joe Biden

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Could it be that Big Oil’s next big thing got a big assist from Joe Biden?

Maybe, if carbon capture and storage is indeed as big a deal as ExxonMobil’s first-of-its-kind deal to extract, transport and store carbon from other companies’ factories implies.

The deal, announced last month, calls for ExxonMobil to capture carbon emitted by CF Industries‘ ammonia factory in Donaldsonville, La., and transport it to underground storage using pipelines owned by Enlink Midstream. Set to start up in 2025, the deal is meant to herald a new stage in dealing with carbon produced by manufacturers, and is the latest step in ExxonMobil’s often-tense dialogue with investors who want oil companies to slash emissions.

The Inflation Reduction Act, passed in August, may determine whether deals like Exxon’s become a trend. The law expands tax credits for capturing carbon from industrial uses in a bid to offset the high up-front costs of plans to capture carbon from places like CF’s plant, as other tax credits in the law lower costs of renewable power and electric cars. 

The Inflation Reduction Act and Big Oil

The law may help oil companies like ExxonMobil build profitable businesses to replace some of the revenue and profit they’ll lose as EVs proliferate. Though the company isn’t sharing financial projections, it has committed to investing $15 billion in CCS by 2027 and ExxonMobil Low-Carbon Solutions president Dan Ammann says it may invest more.

“We see a big business opportunity here,” Ammann told CNBC’s David Faber. “We’re seeing interest from companies across a whole range of industries, a whole range of sectors, a whole range of geographies.”

The deal calls for ExxonMobil to capture and remove 2 million metric tons of carbon dioxide yearly from CF’s factory, equivalent to replacing 700,000 gasoline-powered vehicles with electric versions. 

Each company involved is pursuing its own version of the low-carbon industrial economy. CF wants to produce more carbon-free blue ammonia, a process that often involves extracting ammonia’s components from carbon-laden fossil fuels. Enlink hopes to become a kind of railroad for captured CO2 emissions, calling itself the would-be “CO2 transportation provider of choice” for an industrial corridor laden with refineries and chemical plants. 

An industrial facility on the Houston Ship Channel where Exxon Mobil is proposing a carbon capture and sequestration network. Between this industry-wide plan and its first deal for another company’s CCS needs, ExxonMobil is hoping that its low-carbon business quickly scales to a legitimate source of revenue and profit.

CNBC

Exxon itself wants to develop carbon capture as a new business, Amman said, pointing to a “very big backlog of similar projects,” part of the company’s pledge to remove as much carbon from the atmosphere as Exxon itself emits by 2050.  

“We want oil companies to be active participants in carbon reduction,” said Julio Friedmann, a deputy assistant energy secretary under President Obama and chief scientist at Carbon Direct in New York. “It’s my expectation that this can become a flagship project.”

The key to the sudden flurry of activity is the Inflation Reduction Act.

“It’s a really good example of the intersection of good policy coming together with business and the innovation that can happen on the business side to tackle the big problem of emissions and the big problem of climate change,” Ammann said. “The interest we are seeing, the backlog, are all confirming this is starting to move and starting to move quickly.”

The law increased an existing tax credit for carbon capture to $85 a ton from $45, Goldman said, which will save the Exxon/CF/Enlink project as much as $80 million a year. Credits for captured carbon used underground to enhance production of more fossil fuels are lower, at $60 per ton.

“Carbon capture is a big boys’ game,” said Peter McNally, global sector lead for industrial, materials and energy research at consulting firm Third Bridge. “These are billion-dollar projects. It’s big companies capturing large amounts of carbon. And big oil and gas companies are where the expertise is.” 

Goldman Sachs, and environmentalists, are skeptical

A Goldman Sachs team led by analyst Brian Singer called the law “transformative” for climate reduction technologies including battery storage and clean hydrogen. But its analysis is less bullish when it comes to the impact on carbon capture projects like Exxon’s, with Singer expecting more modest gains as the law accelerates development in longer-term projects. To speed up investment more, companies must build CCS systems at greater scale and invent more efficient carbon-extraction chemistry, the Goldman team said.

Industrial uses are the third-largest source of greenhouse gas emissions in the U.S., according to the EPA. That’s narrowly behind both electricity production and transportation. Emissions reduction in industrial uses is considered more expensive and difficult than in either power generation or car and truck transport. Industry is the focus for CCS because utilities and vehicle makers are looking first to other technologies to cut emissions.

Almost 20 percent of U.S. electricity last year came from renewable sources that replace coal and natural gas and another 19 percent came from carbon-free nuclear power, according to government data. Renewables’ share is rising rapidly in 2022, according to interim Energy Department reports, and the IRA also expands tax credits for wind and solar power. Most airlines plan to reduce their carbon footprint by switching to biofuels over the next decade.

More oil and chemical companies seem likely to get on the carbon capture bandwagon first. In May, British oil giant BP and petrochemical maker Linde announced a plan to capture 15 million tons of carbon annually at Linde’s plants in Greater Houston. Linde wants to expand its sales of low-carbon hydrogen, which is usually made by mixing natural gas with steam and a chemical catalyst. In March, Oxy announced a deal with a unit of timber producer Weyerhauser. Oxy won the rights to store carbon underneath 30,000 acres of Weyerhauser’s forest land, even as it continues to grow trees on the surface, with both companies prepared to expand to other sites over time.

Still, environmentalists remain skeptical of CCS.

Tax credits may cut the cost of CCS to companies, but taxpayers still foot the bill for what remains a “boondoggle,” said Carroll Muffett, CEO of the Center for International Environmental Law in Washington. The biggest part of industrial emissions comes from the electricity that factories use, and factory owners should reduce that part of their carbon footprint with renewable power as a top priority, he said.

“It makes no economic sense at the highest levels, and the IRA doesn’t change that,” Muffett said. “It just changes who takes the risk.” 

Friedman countered by saying economies of scale and technical innovations will trim costs, and that CCS can reduce carbon emissions by as much as 10 percent over time.

“It’s a rather robust number,” Friedmann said. “And it’s about things you can’t easily address any other way.” 



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3 takeaways from our daily meeting: Looking for new stocks, 2 trades, earnings recap

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