“My message to the American energy companies is this: You should not be using your profits to buy back stock or for dividends. Not now, not while a war is raging,” Biden said in October when the prevailing media narrative made him accountable for faster inflation, especially the elevated price of gasoline. Windfall profits, he insisted, should be used to increase production. “Bring down the price you charge” at the pump “to reflect what you pay for the product,” he said. “You still make a significant profit; your shareholders will still do very well.”
International sanctions against Russia and fewer buyers for Vladimir Putin’s oil removed as much as 3% of the global supply, which helped Brent crude fetch a near record $139.13 per barrel earlier this year. Brent now trades at $86 amid signs of a global recession, prompted by central banks raising interest rates to subdue inflation, caused in part by West Texas Intermediate oil’s surge to its highest valuation since 2008. Consumers of gasoline, including Americans who overwhelmingly support Ukraine sovereignty, paid a higher price at the pump after Russia’s February invasion.
Biden scolded US oil producers because they show neither gratitude for their free-market capitalism windfall made possible by American democracy nor sympathy for their retail customers. Biden has no argument with any legitimate business making as much money as it can. His quarrel is with firms exploiting market disruptions caused by Russia slaughtering Ukraine civilians and destroying their food, water and electricity. Corporate America shouldn’t embrace the spoils of a warmongering dictator wreaking destruction on another democracy. Their callousness comes at a point when Americans’ financial distress is increasing after the Commerce Department earlier this month said the personal savings rate as a share of disposable income plummeted to a 17-year low.
After crude oil futures climbed 7% to $80 per barrel from $75 and the average price of gasoline increased as much as 52%, shares of Exxon Mobil Corp., the largest energy company by market value, appreciated 87%. The energy sector is the only group of publicly-traded companies providing a positive price gain in 2022 — 63% on average — while crude oil production remains 9% below its 2019 peak. The total free cash flow of the 23 companies in the S&P 500 Energy Index — the money generated from running their business after capital expenditures — increased 2.3 times to $201 billion during the past four quarters. Free cash for Exxon and Chevron Corp. rose 150% to $60 billion and $36 billion, according to data compiled by Bloomberg. Valero Energy Corp.’s free cash flow was five times greater at $9 billion from the previous four quarters.
Bottom line: Greater than a third of these 23 firms were more profitable this year than at any point in the century, which is another way of saying they were able to charge their customers the highest prices at the lowest cost. At the same time, they were getting more cash from their businesses faster than they could spend it or invest.
Oil company share buybacks increased 1,043% over four quarters, dwarfing the 64% increase for S&P 500 members. Dividends to oil shareholders were up 33%, more than three times the rise for all the companies in the index, data compiled by Bloomberg show.
The industry’s chief executive officers delighted in their largess. Mark Lashier of Phillips 66 told his investors last month that between $10 billion and $12 billion of share repurchases and dividends will be returned to shareholders during the second half of 2022 through 2024 and that the Phillips board authorized an additional $5 billion of buybacks. Vicki Hollub of Occidental Petroleum Corp. said during the quarterly earnings conference call that the free cash flow allocation will shift significantly toward shareholder returns. Dane Whitehead, the chief financial officer of Marathon Oil Corp., promised increased buyback and dividend authorization as a “good use of capital at current market conditions.” Marathon Petroleum Corp.’s Mike Hennigan announced a 30% increase in the quarterly dividend.
All of which was in contrast to the behavior of their counterparts in Europe, where the economic fallout from Russia’s invasion of Ukraine has been much greater. While US energy firms paid 33% more in dividends the past 12 months, or more than three times the increase for all US companies, Europe-based oil producers raised their dividends 17%, or little more than half the 27% average advance of all publicly-traded European companies, according to data compiled by Bloomberg.
With so many consumers suffering rising energy bills, the British government recently announced a tax on the oil’s industry’s windfall profits, following similar measures by governments across Europe. United Nations Secretary General Antonio Guterres urged “all governments to tax these excessive profits and use the funds to support the most vulnerable people through these difficult times.”
Back in the US, most oil companies show no signs of increasing production after Biden said six of the largest publicly-traded oil firms reported $70 billion in second-quarter profits and spent $20 billion buying their own shares, marking “the most significant stock buyback in almost a decade.”
–With assistance from Shin Pei, Junko Shinsha and Zhuo Zhang.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Matthew A. Winkler, editor in chief emeritus of Bloomberg News, writes about markets.
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