Exxon/Chevron: profits gusher should keep on gushing

Big Oil is gushing cash. ExxonMobil and Chevron are the latest supermajors to bank record quarterly profits. The pair handily trounced expectations with a combined net profit of nearly $30bn, more than three times what they brought in a year ago.

Investors — particularly those who stuck with energy stocks during the pandemic-induced oil price crash — will be forgiven for feeling smug. The S&P oil and gas index has more than quadrupled from its 2020 lows. Shares in Exxon and Chevron both set new highs last month.

This may be as good as it gets. With the US in a technical recession and consumer wallets squeezed by inflation, the rally in crude prices is starting to ease. Brent crude climbed above $120 a barrel during the April to June period. Since then, it has retreated about 11 per cent.

The oil industry’s record profits have also become a political flashpoint. President Joe Biden, who in June accused Exxon of making “more money than God”, says lowering gas prices at the pump is a key focus for his administration. Meanwhile, costs are expected to go up as oil service companies look to pass on their higher operating expenses to their clients.

Even so, investors should stick around. Unlike the last oil price boom in 2008, current record profits are not only the result of higher commodity prices. While Exxon and Chevron together generated nearly $34bn in cash from operations in the second quarter, the groups spent around $8.5bn on capital expenditure during the period.

Soaring refining margins — the difference between the cost of buying crude oil and selling refined fuel — are also padding the bottom line. This will moderate as demand slows. But the boycott of Russian oil will put a floor on how low fuel prices will go.

At between 7 and 8 times forward earnings, Exxon and Chevron remain good value. Throw in the enlarged share buybacks and dividends, and they look like reliable cash gushers for at least another year.