Despite Biden, E&P Companies Are Showing Record Profits

On September 9, 2019, then candidate Joe Biden made a clear and unequivocal promise. “I guarantee you, I guarantee you (twice for emphasis I suppose), we’re going to end fossil fuel, and I am not going to cooperate with them.” Those who laughed this off as just another of many crazy campaign promises were dead wrong. Upon being inaugurated, many folks remember one of his first attacks on the industry – the revocation of the Keystone Pipeline’s building permit. He vowed that it would never be completed, at least not during his administration.

On day one, Biden issues an Executive Order requiring agencies to review (and revoke) all of President Trump’s measures to deregulate and stimulate the industry. The same Executive Order required agencies to increase crippling emission regulations, catering to the Green agenda of the left for which he was indebted. He further excluded large swaths of land from oil and gas exploration by hiding behind the guise of National Monument Designations. He issued a moratorium on all E&P activity in the vast Arctic National Wildlife Refuge. He killed the Keystone Pipeline. He revoked President Trump’s Wotus (Waters of the United States) Executive Order and the Antiquities Act, both which had significantly decreased regulations regarding drilling on Federal Lands and elsewhere. This was just on day one. He was dead serious about his war on fossil fuels and came out with all guns blazing.

Throughout 2021, the attacks only increased. He proposed “ending international financing of the carbon-intensive fossil fuel-based industry”. He subsidized Green energies to allow them to compete unfairly with oil. Perhaps worst of all, he rejoined the disastrous Paris Climate Agreement, which President Trump had rejected, propping up energy production in Russia and China, while increasing Europe’s dependence on Russia for their oil and gas needs. These attacks continued, month by month, in 2021, including imposing nearly $150B in tax increases for American oil companies.

So did Biden finally relent in 2022? Hardly. No less than 13 punitive Executive Orders or congressional bills were introduced and passed, all punishing or restricting American energy producers. What industry could sustain such retribution from their own government?

Well, things didn’t turn out exactly as expected. Factors, including the Russia/Ukrain conflict (which likely never would have happened under Trump) and surprising curtailment of production from OPEC joined together with other factors to prop up the price of oil. When oil prices are high, exploration increases accordingly, and the wounded industry began to emerge from injured reserve.

Fact is, the industry is doing remarkable good as of today’s date. How good? Well, I have seen them described as being “swimming in cash”. Industry pundits voiced approval that they seem to be cutting back on borrowing at a near-record pace. As a group, the industry’s free cash flow-to-capital expenditures rose in 2023 to 1.0, from 9.4 in just 2020. It’s forecast to improve even further, nearing 1.4 by decade’s end. Further the borrowing demand for oil and gas companies fell 6% last year, following the 1% decline in 2022. The Anti’s chose to put their own particular spin on this, reasoning that less borrowing will mean less capital, less investment, and, ultimately, less production.

Andrew John Stevenson, Sr. Analyst at Bloomberg Intelligence, sees things differently however. His common-sense opinion is that borrowing is curtailed simply because they are making so much money that they can fund much of their exploration efforts out-of-pocket. He sees the trend continuing through 2029, at least.

“Flush with cash” is how he describes most industry participants, and attributed their healthy balance sheets to rising oil prices, buoyed by OPEC production cuts and robust domestic demand. Oil has been over $70/bbl for about two full years now. Let’s see how long that can be upheld.

Leverage ratio is one of the many determining factors which influence profits. It foretells free cash flow by comparing a company’s net debt relative to earnings (before taxes, interest, depreciation and amortization). It fell to 0.8 last year from 2.4 in just 2020. Stevenson predicts the ratio to fall below zero by decade’s end.

In layman’s terms, E&P companies now produce more money than is needed to fund their capital expenditures, a trend predicted to continue for the next 5 years or more. Several majors, including Chevron and Saudi Aramco, claim to have “enough free cash on hand” to support operations and will “significantly increase production through at least 2030”. This is bad news for the Antis, who have been pressuring banking institutions to divest from the industry. “Keeping fossil fuel in the ground”, as is their mantra, may be more difficult than they anticipate.

The International Energy Agency predicts that demand for oil will increase by 1.3M bbls a day this year to a record high. Exxon/Mobile Corporation and Chevron has both reported earnings recently and predicted their Permian Basin production will increase accordingly by 10% or more this year. Why is this significant? This one US region is so prolific that it, in and by itself, already supplies more oil than Iraq.

I have recently seen rig counts decreasing in some areas and industry lay-offs have begun to occur. Chesapeake just announced a 10% reduction to their workforce, but they are heavily leveraged to natural gas, not oil. Shell and Exxon made similar announcements, but on a smaller basis. However, these things come and go in cycles and I do not foresee these happenings pointing toward an industry downturn.

It’s 2024 – an election year. Will happy days be here again? Will we regain a President who is a friend of the industry? Please vote on November 5. Your country needs to hear your voice.

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