Oil and gas companies have seen skyrocketing growth as the energy crisis triggered by Russia's war in Ukraine has challenged people's quality of life, financial stability, and overall well-being.
The global oil and gas industry's profits jumped to $4 trillion in 2022, up from an average of $1.5 trillion in recent years, said International Energy Agency chief Fatih Birol last Tuesday. Two days later, a report found that the soaring energy prices could push 141 million people worldwide into extreme poverty.
High prices have swelled profits for energy companies, leaving them flush with cash. And their shareholders are certainly feeling that windfall. Exxon Mobil made a record $59 billion profit in 2022, up 157% from the year prior, and the company plans to spend up to $50 billion buying back shares.
Chevron said it would triple its share buyback program to $75 billion. The company also raised its dividend to about 3.4%, double that of the S&P 500 index fund.
Commitment to shareholders has certainly helped bolster stock prices — the S&P 500 ended 2022 down nearly 20%, while the energy sector grew by about 60%. No other sector gained even 5% last year. But it also leaves the industry open to criticism.
During his State of the Union speech, US President Joe Biden criticized oil titans for their record profits and buyback programs. Biden called the numbers "outrageous."
"They invested too little of that profit to increase domestic production," Biden said.
Oil and gas companies are cash-rich but are currently at a crossroads — they want to create a strategy that maximizes returns from high energy prices in the short term while investing in low-carbon businesses for the long term, said Boston Consulting Group in a new report.
At the same time, they're managing demand from shareholders for large returns on investment and calls from government officials to invest that money in production.
So what comes next for Big Oil? Before the Bell spoke with Rebecca Fitz, partner and associate director at Boston Consulting Group's Center for Energy Impact. The interview has been edited for length and clarity.
Before the Bell: Big Oil has had a huge influx of cash — much of which has been passed on to shareholders. Is that sustainable in the long-run?
Rebecca Fitz: Over the past couple of years, particularly last year, these companies saw bumper earnings. But a lot of that free cash flow went to debt reduction, so it was spoken for in a way. But where we are now is their balance sheets look much better — there's virtually no debt in the sector, with some variation between companies. It creates a more urgent question. Yes we expect capital discipline [share buybacks and dividends] to remain, but there is a lot of money and therefore how will it be spent?
There's another set of questions around what type of shareholder payout is optimal. The large publicly traded companies have really preferred to use share repurchases over dividends. And there's a big difference between those two from a value creation ... perspective because a dividend is a promise over the long term while buybacks are a bit more discretionary.
These large payouts to shareholders have garnered a lot of criticism. Is it a good idea to keep investing so much into these programs?
It's just a core critical part of their value proposition to shareholders that they can't stop. They can't ignore shareholders, that's where the payoff comes in.
But there are other things they can do as well. There's abundant cash for reinvestment or new investment at this point, but the challenge is finding competitive, long term reinvestment opportunities.
Given what's happened to the sector over the past decade, not many companies have been looking to really build out an investment queue. And as a result, it's not always entirely obvious where the reinvestment should go for all companies.
And how do companies navigate appeasing shareholders who want immediate profit while also thinking about ways to invest in sustainable energy?
I think the sector has come a very long way in the past two years. Nearly all of the companies in the sector have gone from not having clear emissions reduction goals to embedding emissions reduction goals as central to what they're trying to achieve. The goals can improve, they will improve... But it's actually a real pivot for the sector to have emissions reduction objectives embedded in their performance evaluation and central to strategy.
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