Exxon: Big Oil should invest forward, not buy back

Big Oil had a monster year in 2022. In the US, ExxonMobil and Chevron collectively made more than $91bn in net income. The record profits — which work out to a staggering $173,135 per minute — drove higher dividends and lofty share buyback plans.

Investors should enjoy the moment. Profit growth was already starting to decelerate in the fourth quarter. Earnings are expected to fall this year and next. The decarbonisation challenge is ever more urgent.

Exxon and Chevron generated nearly $100bn in free cash flow last year. Only a small slice of that went into projects that will help them switch away from fossil fuels.

Payouts to shareholders will trump capital expenditures in the near term. Exxon, for example, plans to spend more than $30bn on dividends and share buybacks per year through 2024. That compares with the $20bn-$25bn a year that it has penned in for capex. Of this, about $3.4bn will be on lower emissions projects.

Oil companies are keen to reward investors after shares were marked down during the pandemic. But energy stocks have enjoyed a massive rally. Exxon stock hit a new high last week after climbing some 160 per cent over two years. Chevron, whose shares have more than doubled during the period, is also trading near the record highs set in November.

The insistence of oil majors towards buybacks at such elevated prices is short-sighted.

Exxon has a contrarian reason for sticking with its oil and gas business. It believes the world will consume more crude in 2050 than today. That stands in contrast to BP, which is projecting a 25 per cent drop in demand by 2050.

Despite the big run-up in share prices, the energy sector still accounts for just 5 per cent of the S&P 500. A decade ago, it was more than 11 per cent. That share is set to shrink further.

Oil majors are not the real culprits: blame governments for failing to agree a detailed transition plan. Even so, there is a real danger that Exxon’s 2022 results will be remembered as marking the high point of a collective delusion.