Key Takeaways
- Chevron and Exxon Mobil have announced big earnings beats, as big oil continues to perform exceptionally well in the face of economic uncertainty
- Profits are down around 40% from the all-time high quarterly figures last year, but they’re still almost double the average performance from the past decade
- For investors looking for protection against a potential upcoming recession, oil companies are an attractive option, but not the only option.
2023 was a big year for big oil. While tech stocks were getting hammered, retailers came under huge pressure and even stalwarts like banks felt the pain, energy producers like Shell and Chevron saw solid growth.
For many investors, oil companies were some of the only holdings that they would have seen finish the year in the green.
There were a number of reasons for this, but one of the key aspects was the huge demand for oil off the back of the pandemic, along with the war in Ukraine limiting global energy supplies. This demand meant the price of oil soared, and we all felt it at the pump with the price of gas hitting eye watering levels.
But now oil has started to come back down to earth, and it’s not costing quite so much to top up our cars.
So where does that leave oil companies? Well last week we saw a number of the big ones announce their financial results for Q1, which should provide some insight into the latest happenings in energy. So is big oil still a buy, or are the soaring stock prices running out of gas?
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Exxon earnings beat expectations but down from last year
With oil company profits hitting record highs last year, it was always going to be a tough ask to carry that into 2023. Exxon Mobil, which is America’s largest oil company, announced a profit of $11.4 billion in Q1, which was significantly ahead of analyst estimates of $10.3 billion, but down 11% from Q4 of 2022.
The Q1 figure is also 38% down from the record profit of $18.7 billion that Exxon managed to accrue in Q3 of 2022.
Interestingly, it wasn’t just falling oil prices that impacted the bottom line, with a $200 million ‘windfall tax’ that has been charged by the EU to help its citizens with spiraling energy costs.
Exxon is currently suing the EU with the aim of getting the levy removed, but it’s likely to be some time before we see any sort of resolution from that legal action.
Even so, Exxon has been increasing their oil production and making sizable investments in new oil projects. Their total oil and gas production has increased by almost 300,000 barrels a day when compared to Q1 of 2022, showing that the falling crude price has not been a deterrent to production.
All in all it was a very positive result for a company who’s 2022 earnings were described as “outrageous” by President Joe Biden. Shareholders were expectedly happy and the stock jumped over 1% by Friday’s close.
Chevron also notches beat and expects higher oil prices
Pierre Breber, Chevron CFO, believes that the lower oil prices aren’t likely to be around for long. China has been, until recently, pursuing a zero covid strategy which caused much of the country to remain closed while the rest of the world had opened back up.
This has caused an extended slowdown in the Chinese domestic economy, with demand for oil only just starting to tick up towards the back of 2022. Breber believes that this demand will continue to increase and supplies will remain tight, which could lead to higher prices.
While Chevron’s earnings of $6.6 billion for the quarter are also down over 40% from the all-time high last year, the figure still represents more than double their average quarterly figure from the last decade. So yeh, they’re not doing too badly.
Despite the fact that many investors are looking to move away from energy producers and focus more on cleaner alternatives, institutional investors are finding the consistent profits hard to ignore.
This is particularly relevant given that the economy looks to be headed to a recession, with stocks in companies which are recession resistant likely to become more attractive for fund managers and retail investors alike.
The dilemma of investing in energy producers
Despite the high profile nature of climate change activists and the concern about fossil fuels, the world is a long way off moving fully renewables. Companies like Exxon Mobil and Chevron continue to develop new oil and gas fields all over the world, and demand for their products is higher than ever.
The reality is that we aren’t going to see a wholescale transition away from these forms of energy for a long time. Even as some countries are making bigger inroads into the issues, others, particularly developing economies, have no concrete plans to do so.
For investors who feel strongly about climate change, it’s an interesting dilemma. Regardless of whether an individual is in favor of the continued use of fossil fuels or not, energy companies offer a compelling investment thesis.
They generate significant, consistent profits that have been shown over many years to be particularly resistant to recessions.
Some investors believe it best to exclude oil investment entirely from their portfolios on moral grounds. Others, even those who feel strongly about climate change, believe that being an activist investor and campaigning these companies to spend more on developing alternatives is a better approach.
The bottom line
Oil companies continue to generate significant profits, even as demand has cooled somewhat and prices of crude oil have fallen. For investors, oil companies offer an attractive option through what is expected to be a turbulent time for the economy.
Of course, these aren’t the only types of companies which are considered to be ‘recession resistant,’ with sectors like healthcare and utilities having many of the same properties as energy producers.
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