Why Exxon and Chevron shareholders aren’t phased by bumper profits


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Two things to start: BP raised its dividend and announced new share buybacks. And Oil Search and Santos, two large Australian oil companies, are merging.

Welcome back to Energy Source. I’m writing from Calgary, where I’ll be doing some reporting over the next two weeks. (If you are in the city, please get in touch: derek.brower@ft.com)

I’ve taken two transatlantic trips in the past five months and I was surprised how quickly things have changed. When I flew to Chicago in April, Heathrow was a shadow of itself and the Dreamliner I was on was almost empty. On Sunday, flying through Schiphol to Calgary, airports were bustling — uncomfortably so. No wonder airlines’ confidence is returning.

In the newsletter today, Justin Jacobs reflects on American Big Oil’s bumper quarter — which hasn’t much impressed investors, judging by share performance since Friday’s earnings releases. Our second note stays in the US, where the big bipartisan infrastructure bill has been published. The text is a door-stopping 2,702 pages. And yet it’s only the first stage of what could be a drawn out legislative process.

Thanks for reading.

Where does Big Oil go from here?

ExxonMobil and Chevron last week delivered bumper second-quarter profits. The two US supermajors beat Wall Street expectations as broad swaths of the global economy reopened, fuelling a surge in energy demand and prices.

Shareholders were not terribly impressed though. Neither saw a big bump in share prices on the profit surge, a sign that winning back investors remains an uphill fight. Where do they go from here? Three areas we are watching:

1. Investors still want Big Oil to be a cash dispenser

A couple of good quarters have not undone the damage of last year’s crash. So both supermajors are still spending less than before the pandemic and have resisted the temptation to splurge as oil prices rise.

That has helped shift more cash to investors, drawing shareholders back.

Chevron came out on top, for now. Both companies held their dividends steady, but Chevron reinstated share buybacks — a staple of Big Oil’s pitch to investors for the past decade — sooner than expected. BP has done the same. Exxon remains focused on paying down net debt, which nearly doubled from late 2018 through the end of 2020, to around $63bn.

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Spending should stay low as the companies keep mending the balance sheet while raising the dividend and buying back shares. These direct payouts will remain the biggest selling point for owning Big Oil as the shift to cleaner fuel clouds its high-carbon businesses.

2. Getting greener still tops the agenda

This was the first round of earnings since both Exxon and Chevron suffered major climate-focused shareholder defeats back in late May — a day that shook Big Oil.

Exxon lost an acrimonious proxy vote to the tiny activist hedge fund Engine No 1, which secured three seats on the oil giant’s board. Exxon’s Darren Woods said the newly constituted board has had one meeting so far, which he called “encouraging”. But he does not expect any “huge shifts in the strategy”.

Still it’s clear that carbon capture and storage, a low-carbon focus for the company, is getting more attention. Woods said he expects final investment decisions on two new CCS projects next year — one in Wyoming and another in Rotterdam — and hinted of more to come on the low-carbon front.

Chevron was more coy on the fallout from its own shareholder climate defeat. But it announced the formation of a “new energies” business line — a bit of bureaucratic reshuffling that moved the efforts up the corporate structure. Chevron also teased its first-ever “energy transition spotlight” event this September.

3. Pandemic-era plastics deliver big profits for Big Oil

All those plastic takeout containers, plates and cutlery you’ve used over the past 18 months, along with surging demand for medical PPE equipment, have delivered huge profits for the supermajors.

Exxon’s Woods said margins for polypropylene and polyethylene — two main inputs for consumer plastics — had surged by 140 per cent compared with the last quarter of 2020. February’s deep freeze in Texas downed major petrochemical plants across the Gulf Coast, further tightening supply.

It was the best-ever quarter for Exxon’s chemicals business, but Woods does not see it as a one off. At a time when Big Oil’s budgets are being squeezed, he said “advancing a number of major chemical and also downstream projects” was a priority. (Justin Jacobs)

What’s in the bipartisan infrastructure bill?

The 2,702-page Infrastructure Investment and Jobs Act, now being debated by the US Senate, was published on Sunday. It calls for $550bn in new spending on US infrastructure and marks the Biden administration’s first major legislative attempt to deliver its plan for a sweeping climate-friendly energy overhaul in the US. What else do we know?

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Senate Republicans may have amendments in the debate this week. But the bill is likely to get through, majority leader Chuck Schumer says “in a matter of days”, even if some of the GOP senators who supported it last week have not said yet if they will back it in a final vote.

Clean energy and climate mitigation get some chunky funding, including $21.5bn for an “Office of Clean Energy Demonstrations” and another $16bn for energy efficiency.

But the bill is not the radical energy and climate bill campaigners would like. Analysts at ClearView Energy Partners noted that the text was “a little more fossil-friendly and a little less transition-forward” than expected.

Traditional infrastructure such as roads and bridges get about $110bn of the new spending, compared with less than $40bn for transit. As expected, a clean energy standard and electric vehicle tax credits are not included. This has annoyed some progressive Democrats. It’s also far from the ambitious infrastructure overhaul needed to meet decarbonisation goals, according to analysts.

Ageing nuclear plants get help. Also in line for support: fossil fuel regions facing transition, such as coal communities in West Virginia — home to Democratic Senator Joe Manchin.

Manchin’s vote will be critical in what Democrats are billing as the second part to this first legislative effort. That will be a $3.5tn package pushed into law through budget reconciliation, a process allowing a straight majority vote in the Senate. A vote on party lines will work for the Democrats — provided Manchin is aboard. That’s where a clean electricity standard, subsidies for electric vehicles and renewable energy, and other big climate moves may take concrete form.

But some politicking remains to be done. Leading progressive Democrats insist they will not pass what they consider to be a much more moderate bipartisan bill unless the Senate sends down a more ambitious reconciliation package at the same time. In short, the 2,700 pages published in the Senate are just round one. (Derek Brower)

Data Drill

State lawmakers are picking up their pens on energy legislation. According to research from S&P Global, more energy-related measures have been signed in the first half of 2021 than the past two years combined.

In the first two quarters of 2021, 13 Republican-majority legislatures implemented measures that prohibit natural gas bans. Meanwhile, a challenge to the first-in-the-nation natural gas ban — in Berkeley, California — was recently dismissed. 

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Texas is among the states that have enacted the most energy-related legislation, passing 17 bills following its deep freeze in February. For example, governor Gregory Abbott in June signed House Bill 4492, which authorises the Electric Reliability Council of Texas to access $800m in loans for debts they could not pay off following February’s storm.

States are also setting clean energy targets. Delaware passed a law earlier this year to increase the state’s share of electric sales that come from renewable sources to 40 per cent by 2035. In March, Virginia enacted a bill that called for 30 per cent of electricity sold in the state to be renewable by 2030, and 100 per cent of electricity to come from carbon-free resources by 2040. The state wants to achieve net-zero emissions by 2045. (Amanda Chu)

Column chart of Legislative action surpasses past three years showing Over 180 state energy bills have been enacted in 2021

Power Points

  • Fossil fuel companies are scaling up efforts to loosen US environmental regulations

  • China’s EV industry is challenging Europe and Japan

  • Over 50 investors want a vote on companies’ climate commitments. 

  • The US and UK point to Iran for a drone attack on an oil tanker. 

  • Greenflation” may stall the clean energy transition. 

  • Natural gas may become a “second pillar” of decarbonisation, says a new IHS Markit study. Substituting natural gas for higher-emitting fuels like coal and oil reduces emissions by 50 per cent per unit of electricity. And because of the versatility of natural gas infrastructure, moving towards it will not cause us to be locked into the fossil fuel. The study finds that pipelines, gas-fired power plants, liquefaction plants, and boilers can be repurposed to carry low-carbon gases.

  • How EVs are changing roadside breakdown services. (Wired)

  • Two US solar companies plan to petition the government to extend tariffs on imported solar panels. These tariffs primarily impact imports from Chinese-owned companies, which have been linked to forced labour in the country’s autonomous Xinjiang region. (WSJ and S&P)

Energy Source is a twice-weekly energy newsletter from the Financial Times. It is written and edited by Derek BrowerMyles McCormickJustin Jacobs and Emily Goldberg.

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