Joe Biden wants US oil companies to boost production. Two powerful forces are working against the President’s call.
Wall Street wants oil companies to dump billions in profits on investors instead of spending them freely on new supplies. And the International Energy Agency has warned that oil demand will peak in the middle of the next decade, undermining the case for massive new investment.
Those tensions were evident last week, when ExxonMobil and Chevron reported net earnings that ranked among the largest in their history for the past two quarters.
The two US oil supermajors said they would provide cash to shareholders in the form of higher dividends and share buybacks. They didn’t say they would spend more to increase production.
Goldman Sachs has argued that the sum of these decisions, echoed by smaller oil companies in the US shale field, will be a long period of oil prices above $100 a barrel. West Texas Intermediate Crude was trading at $90 a barrel on Wednesday.
Biden on Monday accused oil companies of “war profiteers” after Russia’s all-out invasion of Ukraine and threatened them with new taxes if they didn’t speed up production. “I think they have a responsibility to act in the interests of their consumers, their community and their country to invest in America by increasing manufacturing and refining capacity,” the president said in a speech.
But investment by US supermajors, which remain more committed to their core oil and gas businesses than their European rivals, has fallen about 30 percent from their pre-pandemic plans.
Exxon announced in 2019 that it plans to spend $30 billion to $35 billion a year on its business, but it’s now targeting about $23 billion a year. Chevron had announced annual capital expenditures of about $19 billion to $22 billion before the pandemic, but now expects $15 billion to $17 billion.
Both companies will update their spending plans in December, but neither said they plan to raise medium-term targets when asked by the Financial Times last week. Chevron is targeting an increase in oil and gas production by 3 percent a year and Exxon by about 2 percent a year, largely due to investments made years ago.
Raymond James analyst Pavel Molchanov said: “Oil companies could drill more, but they don’t want to because their shareholders have pushed them to invest less and instead pay more dividends and share buybacks – and their shares in many cases are not at all -time highs.”
Exxon shares are up 79 percent this year, while the broader S&P 500 index is down 21 percent. It’s a remarkable turnaround from a company that lost a landmark proxy fight 18 months ago, in part because of what activist investor Engine No. 1 labeled the oil supermajor’s overspending.
Chevron is up 52 percent in 2022. “Signals from our investors aren’t suggesting they want to see more investment in manufacturing,” CEO Mike Wirth told the Financial Times last month.
Exxon CEO Darren Woods last week defended the company’s high spending on dividends at a time of high fuel prices for consumers.
“There have been discussions in the US about our industry giving back a portion of our profits directly to the American people. In fact, that’s exactly what we do in the form of our quarterly dividend,” he told investors after Exxon reported quarterly net income of $19.7 billion.
Independent US shale producers, which have accounted for much of the world’s oil supply growth over the past decade, are also keeping their spending steady. Scott Sheffield, CEO of Pioneer Natural Resources, told analysts last week that his company’s “low reinvestment rate” would “moderate oil production growth” but would generate free cash flow that could be paid out to shareholders.
Just days before the industry’s latest record gains, the IEA said it was seeing “definite” signs for the first time that oil demand was about to peak amid current government policies. Crude oil demand is expected to grow at less than 1 percent per year before peaking in 2035, although it still forecasts demand to remain elevated through 2050.
Wirth and other oil sector executives say investors don’t want them investing in part because of the policy and rhetoric in the US and Europe aimed at shifting the economy away from fossil fuels to combat climate change.
“The mood music is important,” said Wirth. “If you ask investors, do you want me to take the money that could come back to you and instead let me put me back into this business that the politicians have said they want to see go away? Investors say, ‘Oh, I’ll take the money’.”
Despite the slowdown in expected consumption, the IEA said the industry would still need to pour about $470 billion a year into oil and gas exploration projects this decade to keep up with demand, about 50 percent more than in recent years.
Goldman Sachs has argued that “structural underinvestment in supplies” across the oil industry could support a sustained run of crude prices above $100 even as the economy slows.
The market may need “steady rises in oil prices in the coming years given the reluctance to invest in oil during the energy transition,” the bank’s analysts said.
Additional reporting by Derek Brower in San Ramon, California
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