Oil giants cautious about spending after surge in profits

Exxon Mobil posted a profit of $56 billion last year, its largest annual revenue ever. Chevron earned $36 billion, also a corporate record. But after a rich 2022, the outlook for these companies and other big oil and gas producers is bleak.

They benefited mostly from higher prices for nearly all fuels last year, as the ongoing recovery from the pandemic slowdown boosted demand and the Russian invasion of Ukraine weighed on supply. The landscape looks different.

Exxon’s fourth-quarter profit of $12.75 billion, while strong, was down sharply from the $19.7 billion reported in the third quarter. Oil prices settled at levels more than a third below their peak shortly after the start of the Ukraine war last February, and natural gas prices have fallen 70 percent from their peaks in August, largely due to an unseasonably warm winter in much of Europe and the United States.

“We don’t know what’s in store for us in 2023,” Chevron chief executive Mike Wirth told analysts last week, adding that the uncertainty required “operational discipline.”

The US Department of Energy has forecast prices for Brent crude, the global benchmark, to average $83 a barrel this year — historically high but 18 percent below 2022 levels year, the ministry predicts, resulting in a national average regular gasoline price of $3.30 a gallon, more than a dollar below prices following the Russian invasion of Ukraine in early 2022. The ministry also expects the Natural gas prices are on average 25 percent below those of the previous year.

While lower prices are a consolation for consumers, they weigh on companies’ bottom lines.

Oil and gas companies expect a profitable 2023, but sales and earnings are likely to fall below 2022 levels. And even as they celebrate their gains, executives warn that the oil business is subject to abrupt swings in supply and demand.

So the companies have promised investors not to repeat the mistake of the past of drilling so much that prices plummet. They have been reluctant to move aggressively to expand production — as President Biden urged them to do when supplies ran short — or to take meaningful steps to build profitability around cleaner fuels. That reluctance could mean tighter markets and higher prices unless a serious recession hits.

Instead, executives said they were committed to returning excess cash to shareholders by increasing dividends and buying back shares. Chevron announced a $75 billion buyback program last week. Exxon announced its own $50 billion buyback plan in December.

While critics often accuse the oil industry of profiteering when prices are high, executives say their companies are vulnerable to cycles. Its share prices have soared over the past year after a decade of underperforming almost every other industry. Just two years ago, Exxon reported an annual loss as demand slumped due to the coronavirus pandemic.

The variables that will drive oil companies’ profitability this year are largely out of their control — in terms of both supply and demand. The war in Ukraine may or may not expand; a recession in the United States and Europe could be deep or averted altogether. Fuel prices and inflation in general will largely depend on how events unfold.

Despite the war, Europe’s economy has been stronger than expected in recent months, in large part because the mild winter has kept gas demand and prices in check.

The International Energy Agency has forecast oil demand to grow slightly by nearly 2 million barrels per day this year, to reach 101.7 million barrels per day. That could support oil company profits.

updated

Feb Jan 2023 1:31 PM ET

With the easing of pandemic restrictions, an increase in air travel has boosted refiners’ demand for kerosene. Oil companies’ ability to provide fuel at reasonable prices may be strained as they have been cautious about increasing production.

And as lockdowns lift in China, its economy should grow faster and demand for oil and gas should increase if the country can weather a new wave of the virus. But the picture remains blurred. Chinese oil imports remain low at the moment and Chinese refiners are preparing for a recovery by producing more fuel for domestic consumption and export.

Another joker is Russia.

With Russia’s war in Ukraine, Russian oil and gas supplies could be curtailed by lower production due to Western sanctions and a lack of foreign investment. Before the war, Russia produced one in ten barrels of oil consumed worldwide. Its exports have declined, albeit more slowly than many analysts expected at the start of the war.

Overall, many in the industry are betting that the balance will tip toward high demand rather than oversupply.

“Despite tight supply, demand for oil and gas is strong and we believe it will remain so,” Jeff Miller, chief executive officer of Halliburton, one of the largest oilfield service companies, told analysts last week. He said the only way to address the supply side of the equation is with “multiple years of increased investment.”

Despite last year’s gains for oil companies, executives have been wary of aggressively making new investments that would yield production gains. But there are signs that they may be recalibrating that risk aversion.

“We are underinvesting as an industry,” Exxon CEO Darren Woods told analysts Tuesday, noting that many oil fields are depleted. “We see the potential for continued tight markets.”

Exxon reported in December that it would spend $23 billion to $25 billion on exploration and production this year, which experts say could lead to a more than 10 percent increase in its oil and gas production. That’s a partial reversal of activity declines during the pandemic.

Mr. Woods said Tuesday that Exxon’s investments are an advantage over those of its competitors as the company advances field development in the Permian Basin between Texas and New Mexico and off the coast of Guyana and Brazil.

He was particularly optimistic about Exxon’s refining business earnings.

“As the economy recovers and China comes out of its Covid lockdown and economic growth there,” he said, “we will continue to see this tightness and high refining margins.”

Chevron plans to spend about $17 billion on exploration and production this year, up over 25 percent from last year but still less than the company had forecast for 2020, before the pandemic impacted energy needs for most of the year 2020 and 2021 lowered.

American oil companies are increasingly focusing their investments on the western hemisphere. Last year, Chevron broke its record for oil and gas production in the United States, even though its global production in 2022 fell more than 3 percent from a year earlier. Exxon reported that it increased its combined production in Guyana and the Permian Basin, its key growth drivers, by over 30 percent.

But oil majors, notably Exxon, Chevron and ConocoPhillips, may be reconsidering that strategy and cautiously returning to the Middle East after decades of looking elsewhere to avoid the turmoil of political infighting and expropriation.

Exxon recently announced that it has acquired two deepwater gas exploration blocks off Egypt. That gives the company a large, uninterrupted stretch of sea between Egypt and Cyprus to explore for gas that could eventually help Europe overcome the loss of Russian supplies.

Chevron, which operates two gas fields off Israel, recently announced a major discovery off Egypt. In his conference call with analysts, Wirth said Chevron was working on development plans in Israeli waters and elsewhere in the eastern Mediterranean.

“We have earthquakes and are developing our exploration plans,” he said. “You’ll hear more about that later on. So it’s a high priority.”