Daily Management Review

With Another Record Quarter, Big Oil Is Prepared To Unlock The Cash Taps


With Another Record Quarter, Big Oil Is Prepared To Unlock The Cash Taps
Top Western energy corporations are likely to payout billions to shareholders when they report their second-straight quarter of record profits, boosted by excellent refining margins and high oil and gas prices.
After a two-year depression, firms such as Exxon Mobil and Shell's profits have been boosted by a swift recovery in demand following the end of pandemic lockdowns and a jump in energy costs spurred by Russia's invasion of Ukraine.
Exxon stated earlier this month that its fourth-quarter profit could exceed $16 billion, nearly doubling its first-quarter earnings.
The companies have utilised the cash influx to reduce debt amassed during the pandemic, and experts believe that once they accomplish their debt targets, they will raise cash distribution to shareholders.
"Given how much balance sheet repair has already occurred in the last 18 months, we believe there is upside to shareholder distribution plans across the sector," RBC Capital Market analyst Biraj Borkhataria said in a note.
The profit windfall has fueled calls for governments to raise taxes on energy corporations in order to assist customers in dealing with record-high electricity and fuel prices. In May, Britain, home to Shell and BP, levied a 25 per cent windfall tax. 
In the United States, President Joe Biden accused Exxon of generating "more money than God" and claimed that corporations were profiting from a worldwide oil supply deficit. more info
Oil prices surged in the second quarter, with benchmark Brent oil averaging roughly $113 per barrel, up from $102 in the first three months.
The strong fortunes of the energy companies – BP Chief Executive Officer Bernard Looney described his business as a "cash machine" – have also placed pressure on boards to rethink their shareholder returns targets, which were primarily developed after the pandemic.
Shell, BP, and TotalEnergies have suggested that they will increase returns through share repurchases.
However, some investors believe they should do more.
Shell CEO Ben van Beurden told Reuters last week that the European Union's largest oil and gas business was exploring increasing returns beyond its existing aim of 20% to 30% of cash generation.
According to Refinitiv analyst consensus statistics, the London-based corporation is expected to report adjusted earnings of $10.8 billion in the second quarter, breaking the previous quarter's record of $9.1 billion.
Shell promised in 2020 to increase dividends by 4% per year after cutting its flagship payout by more than 60% in reaction to a drop in energy demand at the height of the coronavirus crisis, the first cut since the 1940s.
With the favourable outlook for energy prices, some investors and economists believe Shell should increase its dividend even further.
"Based on a $70 long-term oil price, we see significant potential for Shell to increase its dividend and guide towards longer-term dividend growth," Jonathan Waghorn, portfolio manager at the Guinness Global Energy fund, said.
Waghorn believes Shell has the ability to increase its dividend by up to 50% at present pricing.
Jefferies analysts predict that BP will increase its share buybacks to $3.5 billion in the second quarter, up from $2.5 billion in the previous quarter. Analysts at HSBC predict that the London-based corporation will increase its dividend by 4% or more.
TotalEnergies is anticipated to expand repurchases by 50% to $3 billion, according to Jefferies.
Exxon and Chevron, which had ceased share repurchases, have increased cash payouts in recent months, leading analysts to believe share repurchases will remain flat.
Exxon has increased its buyback aim to $30 billion for next year, while Chevron has increased its buyback guidance to the high end of its $5 billion to $10 billion yearly range.
According to BP average projections, second-quarter profits would be boosted by a strong increase in refining margins, which more than doubled in the quarter to $45.5 per barrel.
Shell and Total will report on July 28th, while Exxon and Chevron will report on July 29th. On August 2, BP will release its financial results.