After a Two-Year Rally, Big Oil Ponders What’s Next

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As a famous fictional oil baron once taught, “If you have a milkshake, and I have a milkshake, and I have a straw, there it is.”

After a two-year hot streak leading to bumper profits, the oil industry is suddenly facing the cold reality of a slowing economy and possible recession. While Wall Street typically turns tail in times like these, Big Oil is dangling a big carrot courtesy of post-pandemic boom times: hefty dividends.

Crude Awakenings

You remember the confluence of global forces that propelled big oil to big profits: In both 2021 and 2022, oil and gas groups catapulted the S&P 500’s energy sector into being the market’s best performer — highlighted by a 50% jump in value last year. But the good times, they don’t last. The energy sector is now the S&P’s biggest laggard, down 5% so far even though the overall index has climbed 8%. US benchmark crude oil prices have fallen around 11% to just over $71 a barrel.

Paradoxically, the companies themselves — especially the sector’s largest players — remain absolutely flush with cash. Unlike previous eras of chasing endless growth through reinvestment, oil companies have entered a bizarro world of cutting costs to generate plump profits.

In turn, falling share prices pinned to grim macroeconomics are colliding with the types of dividends-and-share-buyback payouts that Wall Street usually can’t stay away from. In other words, Big Oil is attempting to weather a typical bust cycle by rewarding faithful shareholders with a taste of their boomtime cash reserves:

  • Oil’s big six — that’s Exxon, Chevron, BP, Shell, Eni, and TotalEnergies — own some $160 billion in cash or cash equivalents, according to their first quarter recent earnings report. Chevron and Exxon, for example, collectively have over $48 billion in such assets, a massive increase from just $1 billion a year ago and surpassing the highs of the end days of the Bush 43 era, according to The Wall Street Journal’s accounting.
  • The two giants have now spent more on shareholder returns than capital expenditures in 14 straight quarters, a stark reversal from 28 straight quarters where the opposite was true, the WSJ found.

Still, shareholder anxiety persists. “These companies had high share prices when they were losing money,” Trisha Curtis, CEO of energy consulting group PetroNerds, told the Financial Times. “Now they are making money hand over fist and not being rewarded.”

OMG ESG: The move away from fossil fuels continues to dampen stock market enthusiasm for the oil industry, analysts tell the Financial Times. And, on Monday, State Street announced it would be capitalizing on Wall Street’s waning interest in fossils and waxing interest in green energy by launching new back-office services to clients looking to invest in carbon credits — a market that has nearly quintupled in four years to $950 billion, according to Refinitiv. Maybe it is finally getting easy being green.