Will blockbuster oil profits mean more jobs, stronger recovery for Houston?

Since the start of the pandemic-driven downturn, Big Oil has preached the gospel of “capital discipline” to woo back Wall Street investment to the battered energy sector by controlling spending, limiting growth and delivering profits.

Even as oil prices rebounded above $85 a barrel from $48 a barrel last year, U.S. oil giants such as Exxon Mobil and Chevron remained restrained, funneling the cash to boost dividends, repurchase shares and pay down debt instead of drilling new wells and boosting production.

But after a banner year in which companies delivered massive profits and shareholder returns in 2021, Big Oil appears ready to get off the sidelines and spend, looking to grow production and expand again as crude demand has rebounded from the pandemic. And that could mean new jobs in Houston and Texas, and ever stronger recovery for the local and state economies.

Exxon and Chevron, which reported combined 2021 profits of nearly $40 billion, recently said they plan to increase Permian Basin production this year by 25 percent and 10 percent, respectively. Exxon said it plans to boost capital spending on new projects this year by as much as 44 percent to $24 billion, compared to 2021 levels. Chevron said it plans to increase spending by 20 percent to $15 billion.

ConocoPhillips, which reported profits of $8.1 billion in 2021, said it intends to bring production online from its recently acquired Permian assets from Shell, and boost its capital spending this year by nearly 36 percent to $7.2 billion.

And for the first time in at least two years, Exxon said it was considering “selective mergers and acquisitions,” a costly move that the company had dismissed during the depths of the downturn.

Big Oil is getting room to run because companies are generating the payoffs that investors have demanded as energy companies ride higher oil prices to the biggest profits since 2014. The S&P 500 Energy Index, a group of the largest U.S. energy stocks, rose 48 percent in 2021, recovering to near pre-pandemic levels.

So far this year, energy stocks are up 22 percent, outpacing the S&P 500 index, which is down 4.5 percent.

Changing dynamic

“The dynamic has changed,” said Peter McNally, the global energy leader at Third Bridge, a New York market research firm. “Oil majors are getting a bit more growth because oil prices are higher, and they really delivered on shareholder returns. There is money in their pockets to do this stuff. They’ve got a bit more wiggle room.”

To be sure, Big Oil’s spending plans are nowhere near pre-pandemic estimates. The oil industry’s renewed interest in production growth and expansion also comes at the risk of refueling the ire of investors unsatisfied by the recent run of returns after years of lackluster performance, analysts said.

Large public oil companies will have to walk a tight line, but if they succeed in growing production and while still delivering big profits, Houston stands to benefit as investment flows back to the energy sector, allowing oil companies to invest in new projects and hire more workers again.

“U.S. producers are going to be able to manage dual objectives in 2022,” said Aaron Brady, executive director for IHS Markit, a global research and consulting group. “They’ll be able to return record cash to investors and also grow volumes to help meet fast-recovering world oil demand.”

Analysts are expecting big growth in production this year as demand continues to recover from the pandemic. The Energy Information Administration this month estimated the U.S. will end the year producing about 12.2 million barrels of oil a day, 630,000 barrels a day more than current levels.

That’s a conservative estimate. Conoco CEO Ryan Lance on Thursday said he could see U.S. crude output grow by 800,000 to 900,000 barrels a day this year, surpassing the pre-pandemic peak of 13 million barrels a day.

“Public (oil companies) are kind of regenerating and coming out of the maintenance capital mode in 2021,” Lance told analysts during a conference call Thursday. “We plan to add some activity in all three of the big three (oil basins): The Bakken (in North Dakota), the Eagle Ford (in South Texas) and the Permian (in West Texas and New Mexico).”

Case for growth

Oil giants have certainly built a case for growth.

Crude prices are at seven-year highs, historically a strong market signal to drill more wells and produce more oil. West Texas Intermediate, the U.S. crude benchmark, settled at $90.27 a barrel on Thursday, up $2.01 from Wednesday.

Exxon, the Texas oil major, last year repaid $20 billion of debt and returned $15 billion in dividends to shareholders, while its California rival Chevron repurchased $1.4 billion of company stock and reduced its debt by $12.9 billion. Houston independent ConocoPhillips last year returned $6 billion to shareholders through dividends and share buybacks, and plans to boost shareholder returns to $8 billion this year, up more than 30 percent from last year.

At the same time, Exxon, Chevron and ConocoPhillips have all set ambitions to become net-zero emissions companies by 2050, laying out a strategy to mitigate methane leaks and capture carbon dioxide to satisfy growing investor concern about climate change.

“The industry has kind of ticked all the boxes that they needed to before they could spend more,” McNally said. “Debt’s down, buybacks and dividends are up.”

Investors so far have largely rewarded Big Oil’s disciplined strategy. The industry’s focus on profits, shareholder returns and improving their environmental image have catapulted energy stocks over the past year.

Exxon’s stock price rose by nearly 58 percent last year to $61.19 a share as of Dec. 31, while Chevron stock climbed 46 percent to $117.35 a share. ConocoPhillips shares shot up 87 percent last year to $72.18.

Wait and see

Whether investors can stomach double-digit production growth and spending increases in the Permian remains to be seen. Analysts say investors may have an appetite for moderate growth, as long as profits and shareholder returns keep growing.

“Oil’s hit $90,” McNally said. “There’s a lot more flexibility for companies to walk and chew gum.”

Bloomberg News contributed.



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