Oil Firms Face Hard Choices After a Year of Big Spending
Aug 15, 2023

The industry’s wartime windfall is dwindling

Wall Street wants Big Oil’s cash. Washington wants it to drill more. Keeping them both happy is about to get a lot tougher.

Armed with a mountain of cash after Russia’s invasion of Ukraine sent oil prices skyrocketing, U.S. oil-and-gas firms cranked up production near record levels while also raining money on shareholders with dividends and buybacks.

The continuing investor windfall and a recent run-up in oil prices helped make the energy sector the S&P 500’s best performer over the past month. 



But oil prices are still considerably below last summer’s highs, dragging down producer revenues. That is going to mean hard choices for businesses such as international major oil companies and independent drillers, as well as for energy investors and policy makers who have benefited from the past year’s largess.


“It is moving toward companies spending what they can while they can,” said Mark Young, a senior analyst at data-analytics firm Evaluate Energy. 


How the industry uses its cash in coming years has huge implications for U.S. drivers and energy investors. Oil executives last year buoyed their stock prices by funneling most of their wartime windfalls to investors—not new drilling. As a surge in fuel costs supercharged inflation to 40-year highs, President Biden accused oil firms of profiteering and urged them to invest in boosting capacity.


Higher oil prices gradually encouraged the industry to do just that. Exxon Mobil and Chevron increased capital spending last quarter from a year ago while paying a combined $15.2 billion in dividends and buybacks.

But companies’ ability to keep investing while extending shareholder returns will get harder as their cash piles dwindle from spending and acquisitions. Exxon Mobil and Chevron have a combined $39.4 billion in cash, down from $48.4 billion at the end of the first quarter, according to FactSet.


Investment in the American oil patch last quarter outpaced shareholder returns for the first time since the Kremlin’s invasion, according to Evaluate Energy. The more than 40 oil-and-gas producers tracked by the firm boosted capital spending to $28.4 billion, while funneling a combined $25.4 billion to investors.


In 2019, that group spent an average of $24.3 billion per quarter on projects and $11.3 billion on shareholder returns. Capital spending fell sharply after the pandemic derailed U.S. demand for fuels, only recently surpassing pre-Covid levels.


Better-than-expected production in recent months led federal officials to bump their U.S. output projections for this year to a record 12.8 million barrels of crude a day. A gusher of oil this year blunted the impact of Russian and Saudi production cuts and pushed down gasoline and diesel costs in the first half of 2023.

Smaller exploration and production companies have continued to spend a greater portion of their cash on new projects. 

“We never said that we didn’t want to grow. We just don’t want growth to be the target,” Vicki Hollub, chief executive of Occidental Petroleum, told analysts during an earnings call. 


Many Wall Street analysts expect the recent rebound in oil prices to continue, potentially giving an incentive for more drilling. The tightening market has contributed to what Goldman Sachs recently described as a turning point in capital spending—fueled by a promise of higher returns and a growing focus on energy security.


Other investors remain wary about boosting production. The U.S. and European Union are encouraging more clean energy with a wave of subsidies intended to curb fossil-fuel use in the coming decades. Some experts warn that the best land for oil-and-gas extraction in the U.S. has already been drilled. 


That has left many companies trumpeting cost cuts and new technologies that can more quickly drill longer wells through shale rock. The message to investors: Oil-and-gas producers can increasingly do more with less. 


“This is not just one-off execution,” Toby Rice, CEO of independent natural-gas producer EQT, told analysts last month.

Oil eases on higher US crude output, hopes of Israel-Hamas ceasefire

By Emalee Springfield • 02 May, 2024
HOUSTON, April 30 (Reuters) - Oil prices fell 1% on Tuesday, extending losses from Monday, on the back of rising U.S. crude production, as well as hopes of an Israel-Hamas ceasefire. Brent crude futures for June, which expired on Tuesday, settled down 54 cents, or 0.6%, at $87.86 a barrel. The more active July contract fell 87 cents to $86.33. U.S. West Texas Intermediate crude futures were down 70 cents, or 0.9%, at $81.93. The front-month contract for both benchmarks lost more than 1% on Monday. U.S. crude production rose to 13.15 million barrels per day (bpd) in February from 12.58 million bpd in January in its biggest monthly increase since October 2021, the Energy Information Administration said. Meanwhile, exports climbed to 4.66 million bpd from 4.05 million bpd in the same period. U.S. crude oil inventories rose by 4.91 million barrels in the week ended April 26, according to market sources citing American Petroleum Institute figures on Tuesday. Stocks were expected to have fallen by about 1.1 million barrels last week, an extended Reuters poll showed on Tuesday. Official data from the EIA is due on Wednesday morning. Gasoline inventories fell by 1.483 million barrels, and distillates fell by 2.187 million barrels. Expectations that a ceasefire agreement between Israel and Hamas could be in sight have grown in recent days following a renewed push led by Egypt to revive stalled negotiations between the two. However, Israeli Prime Minister Benjamin Netanyahu vowed on Tuesday to go ahead with a long-promised assault on the southern Gaza city of Rafah. "Traders believe some of the geopolitical risk is being taken out of the market," said Dennis Kissler, senior vice president of trading at BOK Financial. "We're not seeing any global supply being taken off the market." Continued attacks by Yemen's Houthis on maritime traffic south of the Suez Canal - an important trading route - have provided a floor for oil prices and could prompt higher risk premiums if the market expects crude supply disruptions. Investors also eyed a two-day monetary policy meeting by the Federal Reserve Open Market Committee (FOMC), which gathers on Tuesday. According to the CME's FedWatch Tool, it is a virtual certainty that the FOMC will leave rates unchanged at the conclusion of the meeting on Wednesday. "The upcoming Fed meeting also drives some near-term reservations," said Yeap Jun Rong, market strategist at IG, adding that a longer period of elevated interest rates could trigger a further rise in the dollar while also threatening the oil demand outlook. Some investors are cautiously pricing in a higher probability that the Fed could raise interest rates by a quarter of a percentage point this year and next as inflation and the labor market remain resilient. U.S. product supplies of crude oil and petroleum products, EIA's measure of consumption, rose 1.9% to 19.95 million bpd in Feb. However, concerns over demand have crept up as diesel prices weakened . Balancing the market, output from the Organization of the Petroleum Exporting Countries has fallen in April, a Reuters survey found, reflecting lower exports from Iran, Iraq, and Nigeria against a backdrop of ongoing voluntary supply cuts by some members agreed with the wider OPEC+ alliance. A Reuters poll found that oil prices could hold above $80 a barrel this year, with analysts revising forecasts higher on expectations that supply will lag demand in the face of Middle East conflict and output cuts by the OPEC+ producer group. View on the Reuters Website

Oil and gas industry’s “strong” free cash flow to support increasing production targets

By Emalee Springfield • 01 May, 2024
Last year, the demand for loans from oil and gas companies fell 6% year-on-year, and that followed a decline of 1% in 2022. Oil and gas companies don’t need a lot of loans because they’re generating so much money these days from their underlying businesses, said Andrew John Stevenson, senior analyst at Bloomberg Intelligence. And that trend is likely to continue through the end of the decade, he said. “The oil and gas industry has experienced a number of booms and busts over the past few decades, but for now, it appears to be flush with cash,” he said. The healthy balance sheets reflect the boost that companies have received from rising oil prices, buoyed by robust demand and OPEC+ production cuts. The sector’s free cash flow is so strong that the group’s leverage ratio, which measures a company’s net debt relative to earnings before interest, taxes, depreciation and amortization, fell to 0.8 in 2023 from 2.4 in 2020, Stevenson said. The ratio will likely slide below zero by the end of the decade, he said.
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