2022 was an exceptionally good year for the oil and gas industry. With depressed supply from drilling activity slowdowns in 2020 and 2021 and the war in Ukraine, both oil and natural gas prices were elevated throughout the entire year. WTI averaged $94.9/bbl and Henry Hub natural gas averaged $6.45/MMBtu, the highest since 2008.
In 2022 and 2023, M&A activity has slowed considerably compared to 2020 and 2021. Increasing revenues have led to far higher company valuations, which has been a large driver in the M&A slowdown. Additionally, oil and gas firms did not invest as heavily into growth in 2022 as they did in previous booms. Instead, the flush of cash from 2022 boom has gone to stock buybacks, dividends, cash hoarding, and debt reduction.
As shown below, the debt-to-equity ratio of the large-cap oil and gas companies decreased in 2022. Occidental, ended 2021 with a 1.61 debt-to-equity ratio and ended 2022 with a 0.77 debt-to-equity ratio. After famously paying $55 billion for Anadarko in 2019, Oxy was saddled with a relatively ugly debt burden. Then, in 2020, WTI averaged $39.68/bbl. With a high debt load, an aggressive interest rate, and poor commodity prices, Oxy limped painfully along into 2021 and 2022. Restored by recent spikes in oil and gas prices, Oxy has since reduced its debt load, rewarded shareholders, and placated employees who had had compensation and benefits reduced.
For the large-cap companies, net revenue increased sharply from 2021 to 2022. Oxy’s net income increased over eight times, from $1.51 billion in 2021 to $12.4 billion in 2022. Exxon’s and Chevron’s net incomes more than doubled over that period as well. With the elevated commodity prices, revenues increased by corresponding percentages, but because of the moderately high breakeven cost of shale oil, increased oil and gas prices led to an increase in net revenue that was a greater multiple than the revenue multiple.
From Q3 to Q4 in 2022, declining oil prices cooled off the boom and, so far in 2023, gas price has completely crashed. In Q1 2023, oil price hovered between high $60s and low $80s. Though it would appear that the boom time is certainly over, the wave of consolidation, headcount reduction, and operational cost-cutting that swept over the industry in 2020 coupled with the aggressive share repurchase programs and debt reduction that the industry was able to undertake in 2022 has put the energy business in good shape for any negative swings the industry may take in the near future.
The drastic increase in revenues in 2022 drastically lowered PE ratios across the board. While equities have ticked upwards with revenues, they have not scaled directly. The fact that revenue, net profit, and other similar financial metrics have far outstripped equity values is likely due to investors’ knowledge that this boom is temporary and that the market would not long support $120/bbl crude and $8/mmbtu gas. However, the sector remains investible, with the balance sheets of many firms improving significantly in 2022. With several fund managers indicating that they would not divest from their oil and gas equities, Warren Buffett’s Berkshire Hathaway purchasing another 5.8 million shares of Oxy in early March 2023, and relatively stable equity valuations even after the commodity price retreat from Q2 2022 highs, the sector remains investible in the eyes of Wall Street.
Oxy and the small-cap firms saw a much larger spike in profit margin from 2021 to 2022, likely due to the fact that upstream oil and gas revenues were effected much more profoundly by the spike in commodity prices than midstream, refining, chemicals, or any of the other revenue streams that Chevron, Exxon, and other large-cap companies are exposed to. As such, the massive swing in upstream oil and gas operations revenue was not diluted, in the case of independent producers, by the more stable revenue streams in the major’s portfolios.
With OPEC’s surprise production cut promising to buoy oil prices, American rig counts being mostly flat, the war in Ukraine dragging inconclusively onward, DUC inventories being spent, and the SPR approaching exhaustion, oil price appears unlikely to tumble precipitously in the near future. The bad new is that with Spring hastening onwards, no new LNG export terminals scheduled to be completed this year in the US, and US gas production continuing to swell rapidly, gas prices do not appear to have any upward momentum. Movements in the wider economy, driven in part by more potential rate hikes, may likely be the major guiding force in the oil and gas business for the remainder of 2023.
Most oil and gas firms have indicated that their capital spends in 2023 will be slightly higher than in 2023 (driven, at least in part, by the continually inflating cost of oilfield services and equipment). The American majors have redoubled their focus on their onshore US portfolios, specifically in the Permian. Chevron is working to produce 1 MMbbl/d from Permian assets by 2025, Exxon is rumored to be investigating the purchase of Pioneer Resources (the largest Permian producer), and ConocoPhillips continues to digest its purchase of Concho Resources and Shell’s Permian acreage.
See below selected financial data on the firms in question, gathered from macrotrends.net.
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