ANALYSIS: Oil Company Profits Soar

Offshore oil and gas wells. bomboman/Adobe Stock

Top oil companies continue to see massive earnings, according to published earnings reports for the first quarter of 2023 this week.

Energy prices have been soaring following Russia’s invasion of Ukraine in February 2022 and due to persistent global demand.

TotalEnergies, ExxonMobil, Chevron, BP, and Shell reported a combined record profit of $153.5 billion in 2022 and appear on track for another record year in 2023.

Gas and oil output has been rising despite a recent drop in energy prices, which hit historically high levels last year.

Oil companies have taken further advantage of strong consumer demand for energy amid cost-cutting efforts by investors in the wake of the lockdowns.

Investors are now beginning to fear that a economic slowdown this year could weaken demand for energy while supply-chain costs remain elevated above pre-pandemic levels.

Big Oil Companies See Positive Earnings Reports

ExxonMobil reported a record first-quarter profit on April 31 that was about double the amount over the year-ago quarter and exceeded analysts’ predictions.

The U.S. oil company’s net profit rose to $11.43 billion in the first quarter, compared to last year’s $5.48 billion, including a $3.4 billion aftertax write-down after it ceased operations in Russia.

“We delivered a first-quarter record despite the fact that energy prices and refining margins are softening a bit,” Exxon CFO Kathryn Mikells told The Guardian.

Increased fuel production was the biggest contributor to the company’s better-than-expected earnings report, said Mikells.

She said that Exxon’s earnings were driven by more volumes of crude and natural gas from newly launched offshore drilling and refining facilities, which compensated for the drop in energy prices and in fuel production.

Despite the increased revenue, the earnings of both Chevron and Exxon were off more than 40 percent of the record quarterly profits they reached last year.

Chevron’s latest earnings report also beat market expectations, with higher-than-anticipated revenue in the first quarter as net profit climbed 5 percent, to $6.57 billion.

On the other hand, the threat of a deep recession toward the end of 2023 suggest that the rise in earnings may have reached their peak last year, investors told The Wall Street Journal.

BP released its first-quarter performance results on May 2, reporting $5 billion in profit for the first quarter of 2023, compared with $4.8 billion for the previous quarter.

However, this is lower than the $6.2 billion gained in the same quarter last year, but the Britain-based firm still set a 10-year record.

TotalEnergies first-quarter results on April 27 reported $5.6 billion in earnings, a 12 percent gain over the $4.9 billion in the same period last year.

Shell is not expected to release its first-quarter report until May 4, but highlights from preliminary earnings estimates suggest $9.13 billion in profit for the period.

In 2022, TotalEnergies announced $20.5 billion in adjusted earnings, while adjusted net income was at $36.2 billion.

ExxonMobil saw $59.1 billion in adjusted net earnings; Chevron gained $36.5 billion; BP took in $27.7 billion, despite a net loss of $2.5 billion linked to losses stemming from the Russian market; and Shell earned $39.9 billion.

British Government Imposes New Taxes on Big Oil

The industry’s profit windfall last year had earned some criticism from various quarters, as high fuel costs put a strain on consumer finances, particularly in Europe.

The oil giants continued to benefit from their fuel-producing refineries, which remained profitable, as crude prices dropped and further boosted profits in the first quarter.

Some in the United Kingdom, including Ed Miliband, shadow secretary for climate change and net zero policy, attacked BP’s record earnings and accused energy companies of profiting “at the expense of British families.”

The UK’s Office of National Statistics, on April 24, showed electricity prices rise by 66.7 percent and gas prices by 129.4 percent, in the 12 months through March 2023.

To alleviate high energy prices, Whitehall announced the Energy Profits Levy in 2022 to support households dealing with the rising cost of living.

In Britain, oil companies have since been paying millions under a 25 percent windfall tax, which is used to subside household energy bills.

Energy firms operating in the United Kingdom or on the UK continental shelf are subject to the tax until March 2028.

Investors Start Financially Supporting Drilling Again

In America, oil and gas companies have complained about the White House’s reluctance to issue drilling permits and urged the administration to relax regulations, which would allow them to make the investments to lower energy prices.

The Center for American Progress accused energy companies of allegedly not using their excess profits to make key investments in boosting production.

“Instead of using this cash to make the investments needed to help lower the price of oil or to fulfill their climate pledges, companies are giving most of it back to their already extremely wealthy shareholders in the form of stock buybacks or giving it back to themselves in the form of executive bonuses,” the organization said.

Although there is a need for the U.S. oil industry to boost production to keep up with demand, many companies are still finding it hard to attract money from Wall Street to expand operations.

Many investors have not poured money into drilling after many lost billions during a speculative U.S. fracking boom in the 2010s and due to changing views on carbon emissions.

Political pressure toward a low-carbon economy has begun to have an effect on the industry, especially when it comes to investments, but the overwhelming base of energy companies’ revenue is still derived from oil and gas.

For example, oil products and natural gas accounted for, respectively, 44 percent and 48 percent of TotalEnergies’ sales in 2021.

Recent shortages caused by a growing scarcity of oil and gas is pushing energy companies to drill for new discoveries, while attempts by Exxon and Chevron to gain investors begin gaining traction on Wall Street.

Major institutional investors like BlackRock, Capital Group, and Boston Management & Research have increased their positions in Exxon and Chevron, according to FactSet.

Still, the global energy crisis has curtailed attempts to reduce expenditures on oil and gas production for now.

Despite the International Energy Agency’s recommendation that energy companies stop investing in new fossil fuels facilities, most firms are still spending to maintain their existing capacity and to continue development.

Energy Markets Face a Volatile Future in 2023

Energy companies and consumers are also dealing with higher energy prices and market volatility, connected to the Ukraine conflict and OPEC’s recent decision to cut oil production.

OPEC announced a voluntarily production adjustment in April, which extends to the end of 2023.

Several members, including Saudi Arabia, announced an adjustment of 500,000 barrels per day (bpd), Iraq at 211,000 bpd, United Arab Emirates at 144,000 at bpd, Kuwait at 128,000 bpd, Kazakhstan at 78,000 bpd, Algeria at 48,000 bpd, Oman at 40,000 bpd, and Gabon at 8,000 bpd.

Meanwhile, Russia’s adjustment of 500,000 bpd brings the total additional voluntary production adjustments by the abovementioned countries to 1.66 million bpd.

Last year’s scramble for for energy sources showed that oil and gas demand will continue to persist for years, even if green energy becomes widely available.

Pierre Breber, Chevron’s CFO, said the reopening of China from pandemic-related lockdowns in the coming months would likely increase energy demand in the second half of the year.

Breber said that the America’s economic outlook remains uncertain, even though the energy industry continues to hold up as oil supplies likely remain tight.