Big Oil’s cash bonanza

Welcome back to Energy Source. Freeport LNG’s massive liquefied natural gas export plant in Texas could be firing back up again soon.

The company says it has completed repairs after an explosion at the plant back in June knocked it out of commission just as natural gas supplies were under maximum pressure. However, it is still awaiting the sign-off from regulators, and any restart is going to be slow. If it fires back up, it would add supply to Europe, potentially pushing prices there down further. The plant would be particularly helpful in restocking supplies after the winter. It was delivering about 10 per cent of Europe’s LNG supply when it went down in June.

Big Oil’s earnings season kicks off tomorrow with Chevron, which raised eyebrows yesterday with a massive new $75bn share buyback programme. What should we expect from the supermajors this year? That’s the question for today’s newsletter. Let me know what you think at [email protected] And in Data Drill, Amanda looks at Tesla’s weakening grip on the EV market.

Thanks for reading — Justin

A look at where the supermajors will park their cash

There’s no end in sight for Big Oil’s cash bonanza.

When the western supermajors report their earnings over the next couple of weeks the top five producers — ExxonMobil, Chevron, BP, Shell and TotalEnergies — are expected to unveil a record-smashing $200bn in combined profits for 2022, underscoring the scale of the windfall after Russia’s full-scale invasion of Ukraine.

That will probably prove to be a high water mark for the companies. Oil prices are well off last summer’s highs when they hit nearly $130 a barrel, and natural gas prices have cooled significantly this winter. Wall Street expects the lower commodity prices to knock about $50bn off Big Oil’s combined profits this year compared to 2022, bringing it down to about $150bn, according to analyst estimates compiled by S&P Capital IQ.

But if it comes to pass, the $150bn forecast profit would still surpass the previous record high in 2011 and give the companies plenty of financial firepower to keep investors happy.

What should we expect to hear from Big Oil in the coming weeks? Probably a lot of the same. After a decade in the market’s doghouse, the sector has landed on a formula that is working for them and their shareholders. Oil producers have led the market for two straight years (after a decade of underperformance) and are, so far, up this year too.

That means the lion’s share of cash will continue to go to the dividend programmes and stock buybacks that have helped drive share prices higher. Exxon, which has outperformed its Big Oil rivals over the past year, has a $50bn buyback plan from 2022-24 and others could look to try to keep pace.

The splashy shareholder payouts have opened the companies to attacks from political leaders such as US president Joe Biden, who would prefer they plough the windfall back into generating new supply. But there is little evidence the political blowback has swayed boardroom conversations.

In fact, some of the political pressure on Big Oil could ease this year. Fossil fuel prices are no longer at crisis-inducing levels and inflation has been waning in recent months. In the US, the electoral politics of pump prices are not going to be as pressing as they were last year.

With that said, companies have signalled they will raise spending a bit from 2022 levels, although much of that will be absorbed by high oilfield inflation rather than going towards any big new drilling campaigns.

There will also be continued focus — and likely more spending — on the companies’ greener projects. One sign of this is that over the past year Big Oil’s dealmaking has overwhelmingly focused on their low-carbon businesses, rather than securing new fossil fuel reserves. Chevron’s largest deal last year was a $3bn acquisition of biofuel producer Renewable Energy Group. BP splashed out $4.1bn on landfill gas developer Archaea Energy. Shell last week spent $169mn to buy Volta, which operates a network of electric vehicle chargers across the US. Washington’s new incentives for renewables, hydrogen, biofuels and carbon capture in the Inflation Reduction Act will only accelerate these businesses.

Of course, the companies’ financial fortunes will remain hostage to commodity markets. The prospects of a potential recession continues to loom over the sector and contributed to the pullback in crude prices late last year. At Davos, Chevron’s chief executive Mike Wirth said it was “quite likely that we do see a recession”.

But there are signs that crude demand remains resurgent, and most see China’s economic reopening fuelling further demand. The International Energy Agency predicts a 1.7mn barrels a day jump in oil consumption, still higher than most pre-coronavirus pandemic years. Even if oil prices do not surge back above $100 a barrel like some Wall Street bulls are predicting, there appears to be a pretty strong floor under prices for now. For Big Oil that is likely to mean another bumper year. (Justin Jacobs)

Data Drill

All eyes in the electric vehicle industry were on Tesla yesterday and its fourth-quarter earnings. The Texas-based company reported record revenues of $24.3bn for the quarter to the end of December, up 37 per cent from the same period a year ago.

But the report comes as the company faces growing competition from traditional carmakers and macroeconomic concerns weaken demand across the sector.

Tesla accounted for 58 per cent of US EV sales in the fourth quarter of 2022, down from 78 per cent the previous year, according to Kelley Blue Book. Nevertheless, the company is still far ahead of its closest competitor. Second-place Ford only accounted for 9 per cent of EV sales in the fourth quarter.

The landscape looks different outside the US where Tesla faces stiff competition from Chinese companies, which make up more than half of the global EV market. Tesla made up 14 per cent of global electric vehicle sales in the past quarter, down slightly from 16 per cent in 2021, according to Rystad Energy.

“Tesla’s efforts to break into the Chinese market have been relatively fruitless,” said Abhishek Murali, an electric vehicle analyst at Rystad Energy. “Cheaper options dominate the market and Tesla’s higher price point is a significant barrier to entry, forcing the company to lower its prices and shrink margins.”

Tesla recently announced price cuts ranging from 5-20 per cent on models in China, the US and Europe. Analysts speculate one reason for the price cuts is to qualify models for the Inflation Reduction Act tax credits, which require cars to cost less than $55,000 to be eligible.

“As an automaker that produces vehicles and batteries in the US and had reached the cap for the previous credit, Tesla only stands to benefit from the changes brought by IRA,” said Spencer Burget, an analyst at Atlas Public Policy.

On Monday, Tesla announced a $3.6bn investment to build batteries and its electric semis in Nevada. Elon Musk has said it would build 10-12 gigafactories by 2030 to meet its 20mn vehicle sales target, a plan Bank of America analysts estimate would cost as much as $70bn. (Amanda Chu)

Power Points