In the United States, the largest oil and gas companies have brought in more money than they have since the Great Recession. Free cash flow is expected to reach $834 billion in 2022, which is an increase of over 200% from the previous year. As a result, producers are starting to recover from their losses. During the pandemic, executives of oil and gas companies cut back on their spending and production. However, shareholders demanded that the sector become more responsible. Since oil prices have risen, the business cycle has shifted significantly. Most of the money companies have brought in has been used to buy back their stock and distribute it to their shareholders. They are also thinking about their ESG initiatives and developing a plan for the energy transition. Despite the high prices, the market is still unpredictable.
The Impact of Inflation
Rising fuel prices are expected to set a 40-year record this summer. If the prices continue to increase, it will affect the average consumer in the US and push gasoline to over $6 a gallon. Some officials believe that the oil and gas industry’s focus on returns is detrimental to consumers. In a survey conducted by the Federal Reserve Bank of Dallas, over 60% of executives from oil and gas companies noted that the high prices are hindering their ability to expand their production. They also said that the pressure from investors hinders their ability to lower the prices. These factors raise concerns about the sustainability of the US’ fuel consumption. Without an adequate supply response from either the refining capacity or crude oil production, the demand destruction that would lead to higher prices could happen.
The price of fuel is expected to continue rising due to a supply-driven price shock. This could cause the average consumer to cut back on other purchases, which could threaten the overall economy. According to Bloomberg News, some refineries plan to increase their output by implementing various actions, such as postponing maintenance projects. For instance, Valero decided to close a crude unit at its facility in Memphis, Tennessee, to meet the demand.
The Impact of ESG
Due to the uncertainty regarding the future demand for gas and oil, investors are becoming more concerned about the energy transition. This has led to conflicting opinions about the role of the oil and gas industry in the energy transition. Some think companies should focus on renewable energy sources, while others think it’s prudent to maintain their current cash flow. Despite the various factors that affect the operations of US companies, many investors are still reluctant to advocate for a similar path to that of European companies. For instance, due to political pressures and the regulatory environment, many US companies cannot adopt more progressive strategies. Despite the various obstacles preventing companies from adopting environmental, social, and governance (ESG) programs, many still manage to achieve their goals. For instance, oil and gas companies can still implement effective ESG strategies. The leadership of a company should be committed to improving its ESG profile. This can be done through the establishment of a comprehensive human capital investment program. However, it can be very costly to ignore certain issues.
The Impact of Investors
According to Wood Mackenzie, businesses returned almost $9.51 billion to investors in the first quarter of 2022. This is due to the increasing number of oil and gas companies that are implementing variable dividends. These dividends are based on the company’s cash flow. The introduction of these types of dividends has made oil and gas stocks more appealing. The earnings of the top five oil companies, such as BP, Exxon, Chevron, and Shell, increased by more than 300% during the first quarter of 2022. In just three months, these companies have generated a total profit of more than $35 billion. They are almost 28% of the gas that Americans bought during that period.
Takeaway
Due to the high earnings and returns experienced by both companies and investors, both parties should regularly speak with their tax advisors to ensure they have the necessary strategies and resources to manage their tax affairs. As the pressure on companies to adopt ESG programs increases, it’s important that they consider investing in these initiatives.