Oil Prices and Their Impact on Energy Sector Earnings

August 11, 2024

Note: We reveal investment insights through the quotes of top business leaders.

Key Takeaways

Stable Oil Prices: Oil prices have remained firm, allowing major players like ExxonMobil and Chevron to project significant surplus cash generation.
Operational Efficiencies: Companies are adapting through efficiency improvements and strategic investments to mitigate lower upstream realizations.
Downstream Challenges: Maintenance activities and market normalization impact refining results, but strategic projects aim to enhance performance.
Renewable Investments: Fluctuating oil prices drive investments in renewable energy, focusing on carbon capture, hydrogen, and renewable fuels.
Regulatory Impacts: Evolving regulatory requirements, especially in Europe, influence technological advancements and investment attractiveness in the energy sector.

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Current Trends in Oil Prices

Oil prices have remained firm, with Brent crude between $60 and $80 a barrel. Despite recent fluctuations, prices have stayed relatively stable, aligning with pre-COVID levels. This stability has allowed major players like ExxonMobil and Chevron to project significant surplus cash generation, reflecting a balanced market.

"Our overall market conditions were softer in the second quarter. Oil prices remained firm. As a reminder, at Brent between $60 and $80 a barrel real and 10-year average refinery and chemical margins, we expect to generate between $80 billion and $140 billion in cumulative surplus cash from 2024 to 2027." --- (XOM, earning call, 2024/Q2)

"The chart above shows the trend in benchmark prices for Brent crude oil, West Texas Intermediate (WTI) crude oil, and U.S. Henry Hub natural gas." --- (CVX, sec filing, 2024/Q1)

"Between now and then, we have the potential to generate $140,000,000,000 in surplus cash at today's oil prices." --- (XOM, event transcript, 2024/05/29)

"I’m just wondering if you’ve seen any change in prices given the very recent fall in oil prices." --- (CVX, earning call, 2024/02/28)

"ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview In the first quarter of 2024 the price of crude oil remained flat relative to fourth quarter 2023 and near the middle of the pre-COVID 10-year range (2010-2019), as markets remained balanced." --- (XOM, sec filing, 2024/Q1)

Impact on Upstream Operations

Operational efficiencies, strategic positioning, and cash flow impacts are key factors in how oil prices affect upstream operations. Companies like Chevron, EOG, ConocoPhillips, ExxonMobil, and Occidental Petroleum are adapting through efficiency improvements, strategic investments, and leveraging midstream opportunities to mitigate lower upstream realizations.

"Cash flow from operations was impacted by an approximate $300 million international upstream ARO settlement payment and $200 million for the expansion of the retail marketing network." --- (CVX, earning call, 2024/Q1)

"And then if we ever have any kind of downstream interruptions, it can it can divert gas and move it to the higher producing wells to make sure we're maximizing the production potential through that downtime event and then it can switch back to optimal normal operations." --- (EOG, earning call, 2024/Q2)

"Following this transaction, we will remain the largest independent global upstream company, will enhance our position as one of the most durable companies in the U. S. Unconventional industry as measured by depth and quality of our remaining industry and will maintain the benefits of our diverse global portfolio with roughly 40% of our production coming from outside of the Lower forty eight.And this is before the organic investments in LNG, Willow and other conventional assets will come online over the years ahead. I'll now turn it back to Ryan to talk about our distributions and" --- (COP, event transcript, 2024/05/29)

"In upstream, that was driven largely by operational efficiencies. In the information that we would have pushed earlier this morning in terms of the more thorough discussion of the Investor Relations slides that we published on our website." --- (XOM, earning call, 2024/Q1)

"So while with Waha and the situation that it's in now, our upstream realizations are lower but our Midstream business is able to capture opportunity to offset that." --- (OXY, earning call, 2024/Q1)

Impact on Downstream Operations

Maintenance activities, market normalization, and strategic projects significantly impact downstream operations. Companies like Phillips 66 and Valero Energy face challenges in refining results and conversion unit turnarounds, while Marathon Petroleum focuses on enhancing refinery yields and energy efficiency to mitigate these effects.

"Our refining results and market capture of 69% were also negatively impacted by maintenance activities on downstream conversion units, as well as the renewable fuels conversion at Rodeo." --- (PSX, earning call, 2024/Q1)

"Other Impacts The company closely monitors developments in the financial and credit markets, the level of worldwide economic activity, and the implications for the company of movements in commodity prices and downstream margins." --- (CVX, sec filing, 2024/Q1)

"Secondly, maybe this is either for Gary or for Lane. As the market normalizes, how does it impact the way how your refining operations run in terms of the sustainable maximum run rate crude yield or product yield, whatever that you can give some comments that would be great." --- (VLO, earning call, 2024/Q2)

"In addition to these large projects, we continue to execute on smaller high return quick hit projects targeted at enhancing refinery yields, improving energy efficiency and lowering our cost. Let me turn the call over to John." --- (MPC, earning call, 2024/Q1)

"So first quarter, certainly some headwinds with some downstream conversion unit turnaround activity." --- (PSX, earning call, 2024/Q1)

Effect on Renewable Energy Investments

Oil price fluctuations are driving major energy companies like ExxonMobil and Chevron to accelerate investments in renewable energy, focusing on technologies such as carbon capture, hydrogen, and renewable fuels to grow earnings and reduce carbon emissions.

"The renewable energy sector has rapidly gained traction and momentum in these countries as the global focus has shifted to Green Energy and Electric Vehicles (EV) rather than carbon consuming transportation.SAFE HARBOR ACT: Forward-looking statements are included within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended." --- (XOM, press release, 2024/05/02)

"With over 4,400 patents, we're collaborating across industries to advance renewable fuels and reduce carbon emissions." --- (CVX, Twitter, 2024/04/23)

"We're focused on carbon capture and storage, hydrogen, lower emission fuels and lithium. In a fast transition, we'll accelerate investment in these areas to grow earnings and cash flow." --- (XOM, event transcript, 2024/05/29)

"We aim to grow our oil and gas business, lower the carbon intensity of our operations and grow lower carbon businesses in renewable fuels, carbon capture and offsets, hydrogen and other emerging technologies." --- (CVX, press release, 2024/04/26)

"And so it gives us a greater range of potential feedstocks that can then feed into our renewable fuels business, particularly the Geismar real diesel project, which will start up later this year." --- (CVX, earning call, 2024/Q1)

Financial Performance of Upstream Companies

Upstream companies like Oxy, EOG, CVX, COP, and XOM have demonstrated strong financial performance driven by exceptional operational execution, high cash margins, and strategic acquisitions. These factors have resulted in increased volumes, lower operating costs, and higher free cash flow, underscoring the sector's robust financial health.

"In 2023, Oxy's talented and committed employees continued to deliver strong operational performance that drove the company's financial successes." --- (OXY, event transcript, 2024/05/02)

"EOG's performance this quarter can be summed up as exceptional operational execution drives exceptional financial performance, resulting in more volumes and lower per unit operating costs for the same CapEx, yielding higher free cash flow for the year." --- (EOG, earning call, 2024/Q2)

"But continued strong performance there thus far in the second quarter. These are high cash margin, low-breakeven barrels that we're really pleased to have in our portfolio." --- (CVX, earning call, 2024/Q1)

"Kirk Johnson: Hi, Bob, this is Kirk. First, I'll probably just start out by saying our operational performance that this past year has been really strong and that's important having come through the acquisition of the remaining 50% interest in that asset." --- (COP, earning call, 2024/Q1)

"The Stabroek block developments are among the lowest emissions intensity assets in ExxonMobil's upstream portfolio and will provide the world with additional reliable energy supplies now and for years to come. The $12.7 billion Whiptail project will include up to 10 drill centers with 48 production and injection wells." --- (XOM, press release, 2024/04/12)

Financial Performance of Downstream Companies

Downstream companies are enhancing financial performance through strategic initiatives. Phillips 66 focuses on returning cash flows to shareholders and optimizing operations. Marathon Petroleum highlights share price increases and total shareholder returns. Chevron reports lower international earnings due to reduced margins, while ExxonMobil achieves record refining throughput and plans further projects to boost earnings.

"We are committed to returning over 50% of our operating cash flows to shareholders. In refining, we're enhancing performance and reducing our cost structure." --- (PSX, earning call, 2024/Q2)

"Aligned with shareholder value creation, the charge was driven by the $53 or 36% increase in our share price, as well as our total shareholder return performance versus our peers during the quarter." --- (MPC, earning call, 2024/Q1)

["650
651

   634      

   651      

   637      
Refined Product Sales       MBD       
   1,485       
   1,430      

   1,453      

   1,457      

   1,456      
(1) Includes foreign currency effects       $ MM       $       (1       )       $       56

"Our strategic projects, which are another important driver of our planned earnings improvement, helped deliver record first-quarter refining throughput and strong performance chemicals volume growth, and there are more projects planned for startup in 2025." --- (XOM, earning call, 2024/Q1)

"Lashier added, "We continue to increase shareholder value through strong operating performance, disciplined capital allocation and asset portfolio optimization."" --- (PSX, press release, 2024/07/30)

Regulatory Impacts on the Energy Sector

Jurisdiction-specific policies, evolving regulatory requirements, and expanded disclosure mandates, particularly in Europe, significantly impact the energy sector by influencing technological advancements, ESG standards, and investment attractiveness.

"Implementation of jurisdiction-specific policies and programs can be dependent on, and can affect the pace of, technological advancements, the granting of necessary permits by governing authorities, the availability and acceptability of cost-effective, verifiable carbon credits, the availability of suppliers that can meet our sustainability-related standards, evolving regulatory or other requirements affecting ESG standards or other disclosures, and evolving standards for tracking, reporting, marketing and advertising relating to emissions and emission reductions and removals." --- (CVX, sec filing, 2024/Q1)

"If you look at expanded disclosure requirements that Europe is looking for, or if you look at regulation around reducing carbon footprint and not necessarily implementing regulation that's technology agnostic and focused on just reducing carbon intensity, that all makes Europe a much tougher investment proposition." --- (XOM, earning call, 2024/Q1)