After a month of high energy prices, Big Oil will reap billions in profits from the war with Iran
While Big Oil executives met this week to discuss the largest-ever disruption to global energy supply due to the conflict in Iran, they didn't address one aspect of the impact: the multi-billion-dollar windfall that they will make because of the soaring price for the energy they are selling.
Brent crude, the global benchmark oil, has averaged $97 per barrel so far in March. This is up 33% compared to $69 in February. It's even higher than $65 in January. The U.S. and Israeli war against Iran, which began?on 28 February, has halted a quarter of the world supply of oil that flows through the 'Strait of 'Hormuz. In some places, natural gas prices have increased even further.
It could be similar to 2022 when Big Oil broke profit records after the Russian invasion of Ukraine in February rocked the energy markets. In that year, oil companies gave shareholders record dividends and repurchased shares. The public outrage led to calls for windfall profit taxes.
The first quarter will be a phenomenal one for these companies. "I don't believe there's a way around it," said Leo Mariani - a senior analyst at Roth Capital Partners.
U.S. shale companies and other companies that do not have major operations in the Middle East will benefit the most from the higher prices, as they won't be paying for shut-down production, stranded tanks or costly repairs to war-damaged facilities. Executives said that despite the large profits, they will not be able to increase their capital spending for new production.
CHEVRON SHELL AND EXXON MOBIL TO MAKE BILLIONS
LSEG data shows that six analysts who cover Chevron have revised their estimates for the U.S. major oil company's per-share earnings in the first quarter by an average of 40%. Shell analysts in London increased their estimates of net profits for the period from three months to six months by an average 15%.
Wall Street's consensus estimate of Exxon Mobil’s per-share earnings for the full year has been revised upwards by about 4%, but this is smaller than other company forecasts. Stewart Glickman of CFRA Research, the director of equity analysis, believes that this could be due to Exxon's exposure to Middle East disruptions, as it is the largest U.S.-based oil company.
LSEG data shows that four analysts who cover Exxon have increased their earnings estimates in the last month while three have revised them downward.
Exxon's first quarter earnings will be published next month. It will detail the factors that affected earnings. Shell will publish a quarterly update on April 8, detailing the financial impacts of the conflict. Shell's Pearl GTL facility (gas-to liquids) in Qatar has been damaged by attacks in the last month.
Chevron produced 4 million barrels a day during the fourth quarter, and Brent spot prices averaged $64 per barrel. According to a calculation, if the price rose by $33 per barrel in March, then additional revenues would amount to approximately $4 billion.
Exxon produces approximately 5 million barrels per day. If the price per barrel rose at the same rate, March's additional revenue would be about $5 billion.
Some cash flow and earnings may not be visible in the company's results until after the second quarter due to timing effects, including hedging.
Gas prices have also been impacted by the war. Since the beginning of the war, prices for liquefied gas in Asia have risen by 143%.
The downsides of a rerouting of oil and natural gas to meet customer obligations and reduce the oil and gas production in the Middle East may outweigh the upsides. Some facilities were damaged by Iranian drone and missile attacks.
James West, Melius Research's head of energy research, warned that the halt in exploration and production activities?in the Middle East could harm oilfield service companies.
West stated that SLB receives 34% of revenue from Middle East and North Africa, while Weatherford International receives 44%.
Weatherford has not responded to our request for comment. Exxon Shell and Chevron declined comment. SLB referred back to a previous statement which stated that revenue for the first three months would be lower than expected. The company also expects additional costs to result in an impact on earnings per diluted shares of 6 to 9 cents.
U.S. SHALE PRODUCERS? COULD SEE THE BIGGEST GAINS
Glickman stated that Wall Street consensus estimates predict Diamondback, a U.S. producer of shale oil and gas with no international assets will report earnings in the first quarter of around $3 per share. This is 28% higher than previous estimates. Analysts expect the same boost to continue throughout the year, and they have increased their estimates of Diamondback's earnings per share by 22% compared to the estimates made before the war.
Glickman stated that "it suggests company estimates are baking longer-term effects, even while the (Trump administration) is trying to give the market confidence?that traffic will flow again through the Strait of Hormuz." Diamondback has not responded to a comment request.
The oil industry is based on price. "Every oil company has benefited from the price increase," said Anil Aggarwal, founder and CEO of Cairn Oil & Gas in India, a private oil &?gas producer.
Jeff Lawson is the executive vice-president of Cenovus, Canada's largest oil sands company.
Lawson said, "I don't think I can rely on oil prices that we just saw because they feel like a terrible blip."
Lawson didn't comment on what the price spike could mean for Cenovus first-quarter profit, but said that a short-term increase in prices is unlikely to lead to any Canadian oil-sands producers sanctioning a project.
He said: "Oil is going to rise, oil will go down. I have to prove that a new project works five to seven year out." Reporting by Sheila Dang in Houston, Stephanie Kelly, and Amanda Stephenson; Editing by Nathan Crooks Simon Webb, and David Gregorio
(source: Reuters)
