(BOE Report) – As Big Oil executives gathered this week and discussed the biggest-ever disruption to global energy supplies due to the war in Iran, there was one impact they did not address publicly: the multibillion-dollar windfall they will make because of soaring prices for the energy they sell.
Global benchmark Brent crude has so far averaged around $97 per barrel in March, up 33% from the $69 average in February and even more from $65 in January. The U.S.-Israeli war on Iran that started on February 28 has halted a fifth of the world’s supply that passes through the Strait of Hormuz waterway. Natural gas prices in some parts of the world have risen even more.
The situation could resemble 2022, when Big Oil broke records for profit after Russia’s February invasion of Ukraine rocked energy markets. That year, oil companies rewarded shareholders with record dividends and share repurchases. Public outrage sparked calls for windfall-profit taxes.
“The first quarter is going to be phenomenal for these companies. I don’t think there’s any way around that,” said Leo Mariani, a senior research analyst at Roth Capital Partners.
U.S. shale producers and other companies without major operations in the Middle East should gain the most, benefiting from higher prices without costs associated with shut-in production, stranded tankers or expensive repairs to war-hit facilities. Still, executives said the big profits will probably not boost their planned capital spending on new production.
CHEVRON, SHELL, EXXON MOBIL STAND TO MAKE BILLIONS
In the past month, six analysts covering Chevron revised their projections for the U.S. oil major’s first-quarter per-share earnings, raising estimates by an average of about 40%, according to LSEG data. Three analysts covering London-based Shell increased their net profit estimate for the three-month period by an average of 15%.
The consensus Wall Street estimate for Exxon Mobil’s full-year per-share earnings has been revised up about 4% from before the war, smaller than forecasts for other companies. This could be because Exxon, the biggest U.S. oil company, has more production exposure to disruptions in the Middle East, said Stewart Glickman, director of equity research at CFRA Research.
Four analysts covering Exxon increased their earnings estimate in the past month, while three revised them down, according to LSEG data.
Exxon will publish its first quarter earnings snapshot next month, detailing factors that impacted earnings. Shell will release a quarterly update note on April 8 detailing the expected financial effects from the conflict. Part of Shell’s Pearl GTL (gas-to-liquids) facility in Qatar was damaged in attacks this month.
Chevron produced 4 million barrels per day in the fourth quarter and the average Brent spot price was $64 per barrel. Assuming a price rise of $33 per barrel, additional revenues in March would add up to roughly $4 billion, according to a Reuters calculation.
Exxon produces close to 5 million barrels of oil per day. Assuming the same price rise per barrel, additional revenues in March would add up to about $5.1 billion.
Timing effects including hedging mean some cash flow and earnings might not appear in company results until the second quarter or later.
The war has also upended the gas market. In Asia, liquefied natural gas prices have skyrocketed 143% since the war began.
Some upside may be muted by lost oil and gas output from facilities in the Middle East, and the additional cost of meeting obligations to customers by rerouting oil and gas from elsewhere. Some facilities have sustained damage from Iranian missile and drone attacks.
The halt to exploration and production activities in the Middle East, meanwhile, could hurt oilfield-service companies, said James West, head of energy and power research at Melius Research.
SLB gets 34% of its revenue from the Middle East and North Africa region, while Weatherford International gets 44% of its revenue from the region, West said.
Weatherford did not respond to a request for comment. Exxon, Shell and Chevron declined to comment. SLB referred to a previous statement that said revenue for the first quarter would be lower than expected and that the company expects to incur additional costs resulting in an impact of approximately 6 to 9 cents of earnings per diluted share.
U.S. SHALE PRODUCERS COULD SEE BIGGEST GAINS
The consensus of Wall Street estimates projects Diamondback, a U.S. shale producer with no international assets, will report first quarter earnings of close to $3 per share, 28% more than estimates made before the war, Glickman said. Analysts appear to expect a similar boost for the full year and have raised their projections of Diamondback’s per-share earnings by 22% from estimates before the conflict, he added.
“It suggests company estimates are baking in longer-term effects even as the (Trump) administration is trying to provide confidence to the market that traffic will flow through the Strait of Hormuz again,” Glickman said. Diamondback did not respond to a request for comment.
“The oil industry all depends on the price. The price has increased, every oil company is benefited,” said Anil Agarwal, founder of Cairn Oil & Gas, a private oil and gas producer in India.
Bumper first-quarter profits, however, are unlikely to lift capital spending plans or trigger investment in boosting production, said Jeff Lawson, executive vice-president with Cenovus, one of Canada’s largest oil sands companies.
“I don’t want to rely on the oil prices we’ve just seen, because it feels like a horrible blip,” Lawson said.
Lawson did not speak to what the prices could mean for Cenovus’ first-quarter profits, but he said a short-term price spike is unlikely to result in any Canadian oil sands producer sanctioning a new project.
“Oil’s going to go up, oil’s going to go down, and I need to show five to seven years out on a new project that it works,” he said.
(Reporting by Sheila Dang, Stephanie Kelly and Amanda Stephenson in Houston; Editing by Nathan Crooks, Simon Webb and David Gregorio)
