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It’s a good time to be an oil company – and an even better time to be an oil investor.
Over the past two weeks, major oil companies have reported an increase in profits for the first three months of the year. In fact, the profits would have been even greater if they hadn’t accounted for the charges related to leaving Russia.
But this boom is sure to draw the attention of Democrats who believe Big Oil’s profits come at the expense of American consumers struggling with high prices at the gas pump.
Here are three things to know about oil sector profits.
Big Oil is riding the wave of rising energy prices
Unsurprisingly, it all comes down to soaring crude oil prices.
Brent futures, the global benchmark, have jumped more than 40% this year, topping $130 a barrel after Russia invaded Ukraine.
And although prices have since fallen, Brent is still trading above $100 a barrel.
This strengthens the bottom line of oil companies.
ExxonMobil, the country’s largest oil company, said its net profit more than doubled to $5.5 billion from a year earlier. This was even after booking a $3.4 billion charge for exiting its Russia operations.
Meanwhile, Chevron posted its highest quarterly profit in nearly a decade, while Shell posted its highest ever profit.
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The rise in earnings comes despite Russia-related writedowns, and it speaks to the quality of the quarter for Big Oil, analysts said.
“The bottom line is that the industry is certainly generating the highest free cash flow in the 25 years that I’ve looked at this company,” says Doug Leggate, who leads the oil and gas equity research team for Bank. of America, referring to a key indicator for companies.
It wasn’t always so good, though.
Oil companies suffered earlier in the pandemic when crude even turned negative (meaning traders were actually paying buyers to get rid of oil).
Exxon, for example, suffered a historic net loss in 2020, its worst performance in decades.
What’s good for big oil is good for their investors
Record earnings in the first few months of this year are leading to big dividends and stock buybacks for investors.
Exxon plans to repurchase up to $30 billion in stock by the end of next year, triple what it originally planned.
Other companies, including BP and Chevron, are also returning cash to shareholders.
The increase in dividends and buyouts reflects pressure on big oil companies from their own investors, who want these companies to be disciplined about how much they invest in new oil production and return. rather money to their shareholders.
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After all, the oil sector has often been hit by boom and bust cycles.
Oil companies would react to rising crude prices by sharply increasing production. So much so, in fact, that companies would eventually flood the market with oil, often causing prices to plummet – and heavy losses for companies and their investors.
But the pressure will mount from Washington
None of this should sit well with many Democrats.
Big Oil CEOs were summoned to a congressional hearing last month, where House Democrats accused them of defrauding consumers by sharply raising gas prices, which executives strongly denied.
Gasoline prices jumped above $4 a gallon, hitting a non-inflation-adjusted record high of $4,331 in March, according to price records maintained by AAA.
Of course, gas prices are primarily determined by world crude prices, and analysts have long dismissed accusations of price gouging as overly simplistic.
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At the same time, Big Oil is also under pressure to increase production by the Biden administration, which is seeking a solution to high gasoline prices.
Oil companies are increasing production, but they are doing so in a measured way, given the pressure they are under from investors and given that they are constrained by supply chain and personnel issues.
Chevron said it increased oil and gas production 10% in the first quarter from a year earlier, and is on track to increase production for the year.
Bank of America’s Leggate thinks criticism of oil companies is ultimately unfair.
Although oil companies are making windfall profits, he points out that this has not always been the case.
“Obviously we hear a lot about the level of profitability in the industry,” he said. “But remember this industry has lost a lot of money over the last 5, 6, 7, 10 years. And so if you look at it on a 10-year basis, the industry just goes over the top above the break-even point.”