Oil companies set to receive largest returns in 15 years

Aug 29, 2022 News

---

…as cash flow in some companies jump from US$17B to US$300B last year alone  

Kaieteur News – Oil and gas companies globally are positioning for record increases in cash flow, while providing better returns on investment, even as rising costs have severely impacted commodity price and availability. In fact, a BMO Capital Markets report highlighted by Upstream Energy stated oil and gas producers are expected to book record cash flows while offering the best return on capital employed (ROCE) in 15 years.

In June, BMO Capital Markets- the investment banking subsidiary of Canadian Bank of Montreal- provided an oil and gas report highlighting their view on the continued increase in prices, “amidst global product shortages stemming from rising demand, refinery closures, and most significantly, the loss of Russia petroleum product exports.”

An analysis by BMO Capital Markets of 120 oil and gas firms, operating globally, found that stronger oil and gas prices will be the key driver of record cash flows in the industry.

The bank noted that the oil companies generated a record US$300 billion of free cash flow last year, compared to just US$17 billion in 2020 and now, cash flows are set to increase further as energy commodity prices rally.  It was noted too that despite the rising costs of production and inflated costs along the supply chain, the oil and gas sector offers compelling value for a “select subset of producers” with vastly improving returns profiles. “We continue to believe that global under-investment presents substantial upside to fundamental support levels through 2025,” BMO said in the Upstream release. The report pointed out that the oil and gas sector’s return on capital employed (ROCE) could hit next year the highest level since the 2008 global financial crisis, with ROCE possibly topping 25 percent by 2023.

In another report, Deloitte Insights, said that oil and gas exploration and production (E&P) firms globally could generate combined cash flows of a record $1.4 trillion this year, thanks to high prices in the ongoing readjustment in the energy markets. Capital discipline, it noted, resulted in the oil and gas industry being “in one of its healthiest periods currently, with its lowest ever leverage ratio of 20 percent and one of its highest ever dividend yields of six percent, compared to other sectors.

Describing the good time for the oil industry, Deloitte coined this period “the third golden age,” saying that petroleum product prices are soaring “amidst the largest re-alignment in energy supply since the 1970s.” The report noted that crack spreads for gasoline and diesel have reached all-time highs and believe they could rise even higher as the year draws down.

The Deloitte report in highlighting striking the Balance market trends, said that recession worries and energy policy shifts, present downside risks to energy markets. But disrupted trade flows and ongoing financial discipline of oil and gas companies, along with low inventories and spare capacity could limit significant downside, despite volatility in energy prices. It said that over the next decade, oil and gas companies could have a key role in striking the balance between energy security and energy transition, while helping commercialize essential low carbon technologies.

The report continued that a series of disruptions amid ongoing underinvestment triggered the readjustment in the energy market. “Oil and gas producers could report highest-ever free cash flows, as much as $1.4 trillion, in 2022.” Additionally, “global upstream is set to generate up to $1.5 trillion in surplus cash by 2030, possibly with 70 percent of this surplus generated by 2024; this could be enough to fund and balance both low-carbon and core oil and gas priorities this decade.”

Even amid this prevailing situation, oil companies continue to be heavily criticized for being more concerned with returning money to shareholders through dividends and buybacks, than investing in the industry to develop more resource that would increase supply and rescue consumers plagued by high prices.

Earlier this month, United Nations Secretary-General Antonio Guterres urged Governments with oil companies in country to tax excessive oil and gas profits. He sharply criticized the “grotesque greed” of oil and gas companies for making record profits on the backs of poor people. He also slammed fossil fuel companies for the “excessive and immoral profits” they made during the energy crisis sparked by the Russia-Ukraine war in February last.

American President, Joseph Biden also chided oil companies for making large profits on the backs of consumers struggling to meet prices. He said that ExxonMobil, a company operating here in Guyana that is also one of the biggest players in the fossil fuel business, “made more money than God…,” That company’s profits are forecasted to almost double to $43 billion this year; its second-best performance on record.

 

---

---