Publicly listed US oil and gas companies enjoyed an aggregate net income of over $200 billion for the second and third quarters of this year, according to a new S&P Global Commodity Insights analysis of earnings reports and estimates performed for the Financial Times.
In its reporting, the Financial Times notes US oil producers have capitalized on the rising prices of crude that resulted from the geopolitical turmoil generated by Russia’s invasion of Ukraine in February. Oil supermajors, mid-sized integrated groups. and smaller independent shale operators were all included in the $200 billion figure, which according to the Financial Times, was the sector’s, “most profitable six months on record and puts it on course for an unprecedented year.”
Hassan Eltorie, executive director for upstream equity research at S&P said, “Operating cash flow will likely be record-breaking – or at least very close to it – by year’s end.”
Last week President Joe Biden had referred to the record-breaking earnings a “windfall of war,” as he accused the firms of “profiteering” off the conflict in Ukraine. Biden threatened to appeal to Congress to enact windfall taxes on the profits, unless the companies invested them heavily into new production capacity to bring down the soaring prices of crude, and its refined products like gasoline and diesel.
Darren Woods, chief executive of ExxonMobil, said in response to the threat of windfall taxes, that the massive dividends his company paid out to shareholders should be regarded as “returning some of our profits directly to the American people.”
The report noted that the record profits have been underpinned by skyrocketing free cash flow, an industry metric defined as cash flow from operations not counting capital spending. The report also noted that European benchmark Brent crude has averaged over $105 per barrel for the second and third quarters, which far exceeded its average of $70 per barrel over the last five years. In March Brent peaked at almost $140 per barrel.
At the same time, Wall Street has encouraged companies to prioritize shareholder returns over investments in future drilling operations, which may only begin production after the prices of crude have dropped.
Investment bank Raymond James was quoted in the report as estimating that capital spending by the world’s 50 largest producers would come in at about $300 billion this year, which is about half of what it was in 2013, the last time crude prices were comparable to now.
Pavel Molchanov, an analyst at Raymond James said, “Over the past five years, the industry has shifted from ‘drill, baby, drill’ to focusing on what shareholders actually want, which is return of capital. Dividends and share buybacks have never been as generous as they are now.”
