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It’s a good time to be an oil company – and an even better time to be an oil investor.
In recent weeks, major oil companies have reported an increase in profits for the first three months of the year. In fact, the revenue would have been even greater if they hadn’t incurred expenses to leave Russia.
But that boom will no doubt attract the attention of Democrats who believe that Big Oil’s profits come at the expense of American consumers who are saddled with high prices at the gas pump.
Here are three things to know about earnings in the oil sector.
Big Oil moves along on the wave of higher energy prices
Unsurprisingly, it all comes down to rising crude oil prices.
Futures on Brent crude, the global benchmark, are up more than 40% this year to above $130 a barrel following the Russian invasion of Ukraine.
And while prices have since fallen, Brent is still trading above $100 a barrel.
That boosts profits for oil companies.
ExxonMobil, the country’s largest oil company, reported net profits more than doubled to $5.5 billion from a year earlier. That was even after posting a $3.4 billion fee for ending its operations in Russia.
Meanwhile, Chevron reported its highest quarterly profit in nearly a decade, while Shell posted its highest profit on record.
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The increase in profits comes despite write-offs related to Russia, and they speak according to analysts about how good the quarter was for Big Oil.
“The bottom line is that the industry generates the highest free cash flow, certainly in the 25 years I’ve looked at this company,” said Doug Leggate, who leads the oil and gas stocks research team for Bank of America, citing an important benchmark for companies.
However, it wasn’t always that good.
Oil companies suffered earlier during the pandemic, when crude oil even turned negative (meaning traders paid buyers to get the oil off their hands).
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
The record profits in the first months of this year lead to large dividends and share buybacks for investors.
Exxon plans to repurchase up to $30 billion in shares by the end of next year, tripling what it originally expected.
Other companies, including BP and Chevron, are also returning money to shareholders.
The increased dividends and buybacks reflect the pressure that Big Oil is experiencing from their own investors, who want these companies to be disciplined about how much they invest in new oil production and instead return 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 respond to higher crude oil prices by sharply increasing production. So much so that companies would flood the market with oil, often leading to a price crash – and significant losses for companies and their investors.
But the pressure from Washington will undoubtedly increase
None of this is likely to please many Democrats.
Big Oil CEOs were dragged to a Congressional hearing last month where House Democrats accused them of gushing consumers by sharply raising gasoline prices, which executives vehemently denied.
Gasoline prices have risen above $4 a gallon, reaching a record high of $4,331 in March, unadjusted for inflation, according to price data tracked by AAA.
Of course, gas prices are driven primarily by global crude oil prices, and analysts have long dismissed accusations of price inflation as oversimplifying.
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At the same time, Big Oil is also under pressure to increase production from 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 face from investors and given that they are constrained by supply chain and workforce challenges.
Chevron said it increased oil and gas production by 10% in the first quarter from a year earlier, and is on track to boost production for the year.
Leggate of Bank of America finds the criticism of oil companies ultimately unjustified.
Although oil companies make huge profits, he points out that this has not always been the case.
“Of course we hear a lot about the level of profitability for the industry,” he said. “But remember, this industry has lost a lot of money in the last 5, 6, 7, 10 years. And so if you look at it on a ten-year basis, the industry is still just above breakeven.”