US earnings focus shifts to energy sector

A big fortnight for the world’s energy majors with June 30 quarterly reports due from the likes of Exxon, Shell and BP.

These and other giants will reveal record revenues and earnings and perhaps record returns for shareholders.

A taste of what we can expect in the next fortnight came this week from Australia majors Beach Energy (ASX:BPT), Santos (ASX:STO) and Woodside (ASX:WDS) in upbeat and revenue rich quarterly reports.

The Australian trio produced a very strong hint that they are going to reveal record revenues and earnings next month, along with higher shareholder rewards.

For Beach it will be a full financial year to June 30 while it will be interim results for Santos and Woodside, with more to come in the next six months as both companies get a full half’s uplift from big takeovers done in 2021-22.

In the case of Woodside, it’s the BHP Petroleum (ASX:BHP) assets here and offshore (Woodside only received one month’s benefit in the six months to June 30). Santos though had a full six months contribution from Oil Search.

They are not going to be the last energy group around the world to reveal the benefits from firstly the shortage of gas in Europe in 2021 and earlier this year and then the turbocharging of oil and gas prices by Russia’s invasion of Ukraine in late February.

Exxon earlier this month said it could post its strongest quarter yet, with profit potentially surpassing $US16 billion, almost twice its first-quarter earnings.

That could see Exxon match or top the $US23 billion earned for all of 2021 – in just six months!

The companies have used the cash surge to cut debt accumulated taken on during the pandemic when they slashed spending, costs, sacked tens of thousands of employees and hunkered down.

Now debt is reduced, costs cut – although now rising again thanks to the impact of more Covid and rising inflation, plus losses on the exiting of their Russia investments and businesses.

Despite that many analysts, especially in the US think these giants will re-open their coffers and hand out more cash or buybacks.

But it is doubtful that these companies will announcement much in the way of new greenfields investments and for that they will face a new round of criticism for helping keep oil and petrol prices too high and feeding inflation across the global economy.

“Given how much balance sheet repair has already occurred in the last 18 months, we believe there is upside to shareholder distribution plans across the sector,” RBC Capital Market analyst Biraj Borkhataria said in a note to investors this week.

Oil prices rose in the second quarter, with benchmark Brent crude averaging around $US113 a barrel in the quarter, compared with $US102 a barrel in the first three months.

(Oil prices slid yet again on Thursday with Brent off 2.8% to $US103.86 and US crude down 3.5% to $US96.35 a barrel).

Shell and Total report on July 28, Exxon and Chevron report on July 29. BP discloses its financial earnings on August 2.

One company that investors will be watching closely is Occidental Petroleum, the company seemingly being stalked by Warren Buffett’s Berkshire Hathaway which now holds around 19% of the ordinary shares.

With 83 million convertible shares, Berkshire’s total stake in Occidental rises to around 30%. Occidental is due to report August 3.

Perhaps the results will explain the attractions of Occidental, which is a mid-level energy group. Berkshire’s buying has been at or close to the top of the market for Occidental shares.

The surge in energy prices post Ukraine has increased pressure on energy company boards to revise their shareholder returns plans, drawn up mostly after the pandemic struck.

Shell, BP and TotalEnergies have indicated they will boost returns in the form of share buybacks.

Shell CEO Ben van Beurden told Reuters last week that Europe’s largest oil and gas company was considering growing returns beyond its current target of 20% to 30% of cash generation.

The London-based company is forecast to report adjusted earnings of $US10.8 billion in the second quarter, according to Refinitiv data, topping the previous quarter’s record of $US9.1 billion.

Shell pledged in 2020 to raise dividends by 4% annually after it trimmed its payout by more than 60% in response to a collapse in energy demand at the height of the pandemic.

Some investors and analysts want Shell to lift its dividend.

“Based on a $70 long-term oil price, we see significant potential for Shell to increase its dividend and guide towards longer-term dividend growth,” Jonathan Waghorn, portfolio manager at the Guinness Global Energy fund, said, according to Reuters.

Shell has the capacity to increase its dividend by as much as 50% at current prices, Waghorn claimed.

Analysts at Jefferies expect BP to raise its share buybacks to $US3.5 billion in the second quarter from $US2.5 billion in the previous quarter when it took a big loss on its Russian exit.

HSBC analysts expect the London-based company to increase its dividend by 4% or even more.

TotalEnergies is expected to increase repurchases by 50% to $US3 billion, Jefferies said.

Exxon has more than doubled its buyback target to $US30 billion out into 2023, while Chevron has updated its current buyback guidance to the high end of its $US5 billion to $US10 billion annual range.

Second-quarter profits are expected to be boosted by a sharp rise in profits from refining, which have more than doubled in the quarter to $US45.5 a barrel, according to BP’s average estimates.

In Australia Viva Energy (ASX:VEA) and Ampol (ASX:ALD) have revealed big rises in their refiner margins – Ampol’s was more than $US32 a barrel for the June quarter, Viva’s was over $US30 a barrel – both records.

Viva in fact reckons its EBITDA for the June half will be up 140% at $614 million, a record.

These two companies do not have upstream oil supplies to access – they buy on the open market or through supply deals with affiliates (Viva is controlled by the privately owned oil trader, Vitol).

Ampol is the old Caltex Australia that used to be controlled by Chevron. That ended and Chevron is now back in the local petrol market in a small way in competition with its old offshoot through new outlets and rebranding its Puma chain.

In its trading update earlier this month Exxon said it saw a record $US5.5 billion in earnings from its global refining business in the June quarter thanks to a boost of $US4.6 billion from wider profit margins (which is what Viva and Ampol have just reported).