Oil Giants, After Surge in Profits, Are Wary About Spending

Exxon Mobil made $56 billion in profit last year, its largest annual haul ever. Chevron earned $36 billion, also a company record. But after a bountiful 2022, the outlook for those companies and other big oil and gas producers is cloudy.

They benefited for much of last year from higher prices for nearly all fuels as the continued recovery from the pandemic slowdown increased demand and the Russian invasion of Ukraine strained supplies. The landscape already looks different.

Exxon’s fourth-quarter profit of $12.75 billion, while strong, was down sharply from the $19.7 billion it earned in the third quarter. Oil prices have settled to a level more than a third lower than their peak shortly after the Ukraine war began last February, and natural gas prices have crashed by 70 percent from their highs in August, mostly because of an unseasonably warm winter in much of Europe and the United States.

“We don’t know what’s ahead in 2023,” Mike Wirth, Chevron’s chief executive, told analysts last week, adding that the uncertainty called for “operational discipline.”

The U.S. Energy Department has projected that prices for Brent crude oil, the global benchmark, will average $83 a barrel this year — historically high, but 18 percent below 2022 levels. Gasoline-refining margins will slide by nearly 30 percent this year, the department forecasts, leading to a national average price for regular gasoline of $3.30 a gallon, more than a dollar below prices following Russia’s invasion of Ukraine in early 2022. The department also expects natural gas prices to average 25 percent below last year’s.

While lower prices are a comfort for consumers, they take a toll on companies’ bottom lines.

Oil and gas companies expect a profitable 2023, but revenues and profits should drop below those in 2022. And even while celebrating their profits, executives caution that the oil business is subject to abrupt swings in supply and demand.

So the companies have promised investors not to repeat the past mistake of drilling so much that prices crash. They have been hesitant to move aggressively to expand production — as President Biden urged them to do when supplies were pinched — or take meaningful steps to build profitability around cleaner fuels. That restraint could mean tighter markets and higher prices unless there is a serious recession.

Instead, executives said they were committed to returning surplus cash to shareholders by increasing dividends and buying back shares. Chevron announced a $75 billion buyback program last week. Exxon announced its own $50 billion repurchase plan in December.

While critics often accuse the oil industry of profiteering when prices are high, executives say their companies are prone to cycles. Their share prices have rocketed over the last year after a decade of underperforming almost every other industry. Only two years ago, Exxon reported an annual loss as demand collapsed because of the coronavirus pandemic.

The variables that will determine oil companies’ profitability this year are largely out of their control — in both supply and demand. The war in Ukraine could expand or not; a recession in the United States and Europe could be deep or averted entirely. Prices for fuels, and inflation generally, will largely depend on how events play out.

Despite the war, Europe’s economy in recent months has been stronger than expected, in large part because the mild winter has kept gas demand and prices in check.

The International Energy Agency has projected that oil demand this year will grow modestly, by nearly two million barrels a day, reaching 101.7 million barrels a day. That may support oil company profits.

As pandemic restrictions have eased, an increase in air travel has added to the demand on refineries for jet fuel. The ability of oil companies to provide fuel at reasonable prices could be stretched, especially since they have been cautious about increasing production.

And with lockdowns lifted in China, its economy should grow faster, and demand for oil and gas should increase, if the country can overcome a new virus surge. But the picture remains unfocused. Chinese oil imports remain low for the moment, and Chinese refineries are gearing up for a recovery by producing more fuels for domestic consumption and export.

Another wild card is Russia.

With Russia’s war in Ukraine, Russian oil and gas supplies might be constrained by lower production because of Western sanctions and a lack of foreign investment. Before the war, Russia produced one out of every 10 barrels of oil consumed worldwide. Its exports have declined, although more slowly than many analysts expected at the outset of the war.

Overall, many in the industry are betting that the balance will tip toward high demand, not a glut.

“Against tight supply, demand for oil and gas is strong, and we believe it will remain so,” Jeff Miller, chief executive of Halliburton, one of the largest oil-field service companies, told analysts last week. He said the only way to address the supply side of the equation would be “multiple years of increased investment.”

Even with last year’s bottom-line bonanza for the oil companies, executives have been wary of aggressively pursuing new investments that would yield production gains. But there are indications that they may be recalibrating that risk aversion.

“We are underinvesting as an industry,” Darren Woods, Exxon’s chief executive, told analysts Tuesday, noting that many oil fields were depleting. “We see the potential for continued tight markets.”

Exxon reported in December that it would spend $23 billion to $25 billion on exploration and production this year, which experts say could drive an increase of more than 10 percent in its production of oil and gas. That is a partial reversal from declines in activity during the pandemic.

Mr. Woods said Tuesday that Exxon’s capital spending relative to competitors’ would be an advantage as the company pushed forward with developing fields in the Permian Basin straddling Texas and New Mexico, and offshore Guyana and Brazil.

He was particularly upbeat about Exxon’s refining-business profits.

“With economies picking up, and China coming out of its Covid lockdown and economic growth there,” he said, “we’ll continue to see that tightness and high refining margins.”

Chevron plans to spend roughly $17 billion this year on exploration and production, over 25 percent more than it did last year but still less than the company had projected it would spend in 2020 before the pandemic slashed demand for energy during most of 2020 and 2021.

American oil companies have increasingly focused their investments in the Western Hemisphere. Last year, Chevron broke its record for oil and gas production in the United States even as its global output declined by more than 3 percent in 2022 from the year before. Exxon reported that it increased its combined production in Guyana and the Permian Basin, its principal growth drivers, by over 30 percent.

But the major oil companies, particularly Exxon, Chevron and ConocoPhillips, may be rethinking that strategy, and cautiously moving back to the Middle East, after decades in which they looked elsewhere to avoid the turbulence of political strife and expropriations.

Exxon recently announced that it had acquired two deepwater blocks for gas exploration off Egypt. That gives the company a large unbroken stretch of sea between Egypt and Cyprus to explore for gas that could eventually help Europe overcome the loss of Russian supplies.

Chevron, which operates two gas fields off Israel, recently announced a large discovery off Egypt. In his conference call with analysts, Mr. Wirth said Chevron was working on development plans in Israeli waters and elsewhere in the East Mediterranean.

“We’ve got seismic and we’re developing our exploration plans,” he said. “You’ll hear more about that as we go forward. So, it’s a high priority.”