Exxon’s second quarter profits could cover more than half company’s stock buybacks

Jul 05, 2022 Peeping Tom

…can repurchase 10percent of shares by year end

Kaieteur News – Favourably high oil prices have significantly contributed to improved performance of oil companies with increased profits being reported. So much so that major oil companies have begun to buy back company shares creating value for their shareholders.

Capital cut backs could support higher commodity prices, and contribute to higher dividends through share buybacks

In April, Exxon Mobil dramatically increased its share buyback program to $30 billion through the end of 2023, “however, it looks like the company’s second quarter 2022 earnings will be enough to cover more than half of that,” financial markets information provider, Seeking Alpha has analyzed.

A securities filing by the oil giant last Friday, indicated huge profit margins from fuel and crude sales to generate record quarterly earnings. “That means the company could comfortably repurchase 10 percent of its shares by the end of the year, giving it room to expand its buyback program.” The content provider agency said that Exxon has managed to substantially reduce its debt, so its overall financial portfolio is quite strong.

At US$60 per barrel Brent, Exxon should earn almost $200 billion in free cash flow (FCF). At US$50 per barrel, it is still expected to be roughly US$165 billion. However, at current Brent prices, the company’s FCF is expected to be closer to roughly US$400 billion, “or more than the company’s entire current market capitalization.” It was explained that once prices remain stable, Exxon “can pay its dividend and complete its entire share repurchase program within 2022,” while debt pay-down will also enable the company to significantly reduce its interest expenditures. “Regardless of how the company spends its money, the potential for substantial shareholder returns is clear,” the agency said.

The largest risk to major oil and gas producer is oil prices, Alpha said. “The company is profitable at a Brent crude price of roughly $50/barrel…we expect prices to comfortably remain above that level through 2026, however, below that, the story begins to change. If prices remain lower than that for long, the company becomes a much worse investment.”

Exxon Mobil is nonetheless growing rapidly, with a unique portfolio of assets. Guyana’s lucrative Stabroek Block was highlighted as one of those unique assets to add floating production storage and offloading unit (FPSO) every year, with each pumping more than 200 thousand barrels of oil per day in a production arrangement where the company has a 45 percent stake.

“It is a profit machine at current prices,’ Alpha asserted. “Given strong margins in the refining markets, the company is seeing strong financial performance in all segments of its business.” With the ability to repurchase almost 10 percent of its outstanding shares, it is expected that the advantage was taken of recent weaknesses in the market. “The company’s dividend is now back over 4 percent, and the company is protecting its longevity with Current Cost Supplies (CCS) investment. In our view, this combination makes the company a valuable investment,” Alpha opined.

Following news of Exxon’s second quarter prospects last Friday, U.S. Representative Ro Khanna said that the company’s record-breaking profits reinforce calls for Congress to pass a windfall tax on major oil companies. “Big Oil companies should be providing relief to their customers, not pouring billions into stock buybacks to enrich their investors.” Exxon related a projected sequential increase of about $7.4 billion in operating profits compared with the first quarter. “The securities filing indicates a potential profit of more than $16 billion for the second quarter;” a peak quarterly profit of $15.9 billion was last recorded in 2012.

Forbes Advisor described stock buybacks as companies’ using cash to buy shares of its own stock on the open market to return money to shareholders that it doesn’t need to fund operations and other investments. Companies may also buy back their own stock to create value for their shareholders, in this case, value through rising share price. Whenever there’s demand for a company’s shares, the price of the stock rises. When a company buys its own shares, it’s helping to increase the price for its stock by boosting demand, thereby creating value for all shareholders. A stock buyback can also be an expression of confidence in the company’s stock.

In April, Bloomberg financial reported that Exxon Mobil and Chevron Corporation had pledged to ramp up shareholder returns as crude oil and natural gas prices surged to multi-year highs following Russia’s invasion of Ukraine. Despite pleas from politicians to ease the burden on consumers, the U.S. oil explorers focused more on rewarding investors while keeping drilling budgets in check. Exxon had pledged a US$30billion dollar buy back; while Chevron said it would repurchase a record $10 billion of stock before the end of this year.

In February, seven major oil companies, including BP, Shell, ExxonMobil and Chevron were poised to return US$38billion to shareholders through buyback programmes in 2022, Bernstein Research data noted. That would have been almost double the $21billion in buybacks that were completed in 2014 when oil last traded above $100 a barrel. This sum has already been surpassed with the April announcements, and could possibly increase. Oil companies are said to be paying record prices to buy back its own shares in this lucrative oil price scenario brought on mainly by the Covi-19 pandemic and the effects of the Russian invasion of Ukraine.