As oil and gasoline prices pulled back from recent highs, second-quarter reports from oil companies signaled continued reluctance to meaningfully increase production. OPEC-member Saudi Arabia, meanwhile, hinted at possible production cuts to bolster prices, while U.S. and European negotiators scrambled to revive a deal with Iran that would release sanctioned oil back onto world markets.
Following a tough year in 2020, oil company earnings accelerated sharply in 2021 and 2022. Exxon Mobil, Chevron, Shell were just a few among many in the industry reporting record second-quarter profits. Production, however, has remained mostly flat a fact that doesn't appear set to change.
Data from the U.S. Energy Information Administration (EIA) shows oil and gas companies downshifted both capital spending and production for the second-quarter.
An EIA review of 53 public U.S. gas and oil companies, collectively responsible for about 34% of domestic production, showed combined cash flows increased 86% to $25.7 billion during the first quarter. Meanwhile capital spending nearly doubled compared to 2021.
However, these same companies reported a 5% decline in capital expenditures in the second-quarter vs. Q1 this year. And while crude oil production has increased 10% compared to the first quarter, it remained flat compared to Q4 2021, according to the federal data review.
First-quarter reporting showed capital spending for oil and gas producers was up an average 23% vs. the same period in 2021. The bulk of that spending — some analysts have estimated around two-thirds — went toward covering inflation costs. Only 8% went into new production growth.
Oil Companies Highlight Buybacks Over Production
During second quarter earnings calls, oil company executives were tight lipped about 2023 development and production plans. However, they did hint they are more focused on returning value to investors, mainly in the form of buybacks, than on increasing oil production.
Buybacks effectively reduce the number of a company's shares available while propping demand for the stock. This supply/demand combination tends to boost the per-share stock price. In addition, company earnings are figured against a smaller number of shares, effectively boosting the quarter-end earnings-per-share numbers. Both are factors seen as highly desirable by investors.
Buybacks also deliver more voting leverage back into the hands of companies. Such authority has held increased significance in the minds of oil industry executives since last May. That's when activist investment firm Engine No. 1 rallied Exxon shareholders to elect three board members tasked with emphasizing climate change as a priority, and beginning to diversify the oil company away from fossil fuel.
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Exxon Mobil announced in Q1 plans to buy back up to $30 billion worth of its shares by the end of 2023. Meanwhile Chevron increased its top-end buyback guidance to $15 billion per year. In Q2, Shell also announced that it has launched a $6 billion share buyback program for Q3.
"We're definitely focused on being efficient as we look to return capital to shareholders," Exxon Mobil CFO Kathryn Mickells told investors.
During the Q2 earnings call, Chevron CFO Pierre Breber said the first financial priority for Chevron is to grow the dividend, the second is to invest and grow energy opportunities and the third is to maintain a strong balance sheet.
"When we have cash in excess of those first three priorities, we buy back shares," Breber said. "We'll continue buybacks even when the commodity cycle turns down."
Occidental Petroleum CEO Vicki Hollub told investors in early August the company plans to "buy back a significant volume of shares, or at least we hope to, over the next few years."
"We don't feel the need to grow production until we get beyond that point, because we feel like one of the best values right now is investment in our own stock," Hollub said.
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Shale oil producer Pioneer Natural Resources increased its base dividend by more than 40% in the second quarter.
PXD repurchased $750 million since the end of the first quarter, including $500 million during the second quarter and additional $250 million repurchased in July at an average share price $213.
"As I've always said, we would aggressively repurchase shares when the market presented opportunities," CEO Scott Sheffield said.
During the Q2 earnings call, Exxon Mobil CEO Darren Woods said there are plans to expand refining capacity by around 250,000 barrels per day in the first-quarter of 2023. Capital spending decreased slightly from Q1 to $4.6 billion in Q2. However, spending has spiked 21% compared to last year.
Q2 Output From Oil Companies
Exxon Mobil's capital investments totaled $9.5 billion for first half of 2022. Management said this was in line with its full-year guidance of $21 billion-$24 billion. Exxon produced 3.7 million oil equivalent barrels per day in the second quarter, a 4% increase from the first quarter.
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But while production did increase, Exxon Mobil cautioned that expanding output any further is unlikely. Woods said the refining market is extremely tight and that "growing supply will not happen overnight."
"Frankly, given the tightness in the market, (and) the availability of rigs, there's not a whole lot of opportunity to move there," Woods said during the Q2 earnings call.
California-based Chevron saw its EPS balloon 240% in the second quarter. CVX's capital spending in the first half of the year increased 26% to $6.7 billion. That was up from $5.3 billion in 2021. Chevron CFO Breber told investors in late July he expected CVX to end 2022 below its $15 billion spending budget.
The energy giant produced 1.72 million oil-equivalent barrels per day in the second quarter. That was a decrease of 266,000 barrels per day vs. Q2 2021.
Breber added that the plan is to increase investment activity in 2023, but would not go into specifics until December.
"We've been ramping up during the course of the first half of the year," he said. "I think you'll see us higher in the second half of the year."
Global Oil Forecasts
The International Energy Agency (IEA) recently raised its forecast for 2022 global oil consumption to 2.1 million barrels per day. This is up by 380,000 from previous estimates.
Meanwhile, the Organization of the Petroleum Exporting Countries (OPEC) has cut its demand forecast three times since April. It now expects global demand growth for oil to increase by an average 3.1 million barrels per day this year. The group's August report left its 2023 demand growth projection unchanged at 2.7 million barrels per day.
Oil and gasoline prices have dropped from highs in June. U.S. Crude oil prices have recovered to around $94 per barrel in the past week, after dipping below $86 and to their lowest levels since January. Crude prices hit $130 briefly in March after Russia invaded Ukraine.
The average national price of gasoline hit a historic high of $5.01 per gall on June 14. The U.S. has seen a trending decrease in the average, sending current prices below $3.90 a gallon. That is well off highs, and about 74 cents above year-ago levels.
However, analysts do not believe prices will remain down for long.
In early August, Goldman Sachs analysts wrote they expect the oil market to "remain in unsustainable deficits at current prices." That is particularly true as the U.S. Gulf of Mexico swings into its annual hurricane season.
Goldman Sachs also forecast the price of gasoline will average around $4.40 in 2023. The analysts cited U.S. refining and market margins as the reason for the price increase. Goldman Sachs does not see these margins beginning to normalize until the second half of 2023.
U.S. Oil Supply
While oil companies' output is mostly flat, overall production is beginning to fall. Last week, U.S. crude oil production was 12 million barrels per day. That is a drop of 100,000 barrels from 12.1 million barrels a day the week prior and 12.1 million barrels per day the week before that. However, that was still the highest level since April 2020, according to the EIA.
The number of active oil rigs in the U.S. had been angling higher but has recently fallen off marginally. Rig activity in the U.S. posted its first three-week decline since July 2020, according to weekly data from Baker Hughes. Last week there were 762 active rigs in the U.S. That is slightly down from the previous week but a 5% increase compared to early June. The drop off has been driven by a decline in natural gas rig drilling. BKR releases weekly oil rig counts every Friday.
Oil rig activity is still well above last year's depressed levels, with a count of 503 active rigs in August last year.
Drilling Activity Flattens As Oil Prices Soar
U.S. crude oil output is estimated to average 11.9 million barrels per day for all of 2022, an average increase of 700,000 barrels a day — or 6.3% — compared to 2021, according to the federal estimates.
Government forecasts also suggest crude production will increase again in 2023 to more than 12.8 million barrels per day. If this prediction holds, it would be a modest 3% gain over projected 2022 levels. It would, however, be enough to surpass the annual average record of 12.3 million barrels per day set in 2019.
OPEC forecasts an 800,000 barrel-per-day jump in U.S. crude oil output, to average 12.7 million bpd in 2023.
Those estimates jibe with the 2023 views of most oil and gas executives surveyed in June by the Dallas Federal Reserve. The survey showed expectations for U.S. crude oil production up by no more than 1 million barrels per day for the year.
Some 37% of executives anticipate production will increase by more than 800,000 barrels per day, but not more than 1 million. Another 34% believe production will grow no more than by 800,00 barrels per day.
Please follow Kit Norton on Twitter @KitNorton for more coverage.
