Energy companies are on track to report an astonishing cash haul in their third-quarter earnings releases.
All five global oil majors are set to report earnings on Thursday and Friday. Even after paying for their operations and capital projects, they're expected to have $54 billion in cash left over for whatever else they want to do with it. It's part of a war-driven windfall that research firm Wood Mackenzie said could bring in half a trillion dollars this year to global oil and gas firms.
The question now is how they will use all that cash. The answer from several experts seems to be: not much. In the old days, if energy companies made a windfall like this during an extended period of high oil prices, they would almost certainly have boosted their spending on drilling. But since the last sustained oil crash about a decade ago, oil companies have become much more careful about spending, in an attempt to soften the boom-and-bust cycles that have turned off investors in the past. For most investors, that's what they want. Oil companies can confidently stow away the money they're making today in a rainy day fund. It may cap their upside, but it also limits their eventual downside.
Oil companies won't just be careful about how they use their cash -- they'll probably be careful with how they talk about it too. It's not a great look to be making money hand over fist when people are struggling to pay for gasoline. Celebrating blockbuster earnings results can attract the wrong kind of attention, like wearing a gold Rolex on the subway.
In the past, politicians have criticized oil companies for "price-gouging" when they profit off of high prices driven by war or other geopolitical strife. In Europe, they've levied windfall taxes on oil firms at times like this. Even President Donald Trump, who has otherwise passed big tax breaks and industry-friendly regulation, has lashed out at the industry during profit sprees.
"They know what they're making," said Neal Dingmann, an analyst at William Blair. "In one sense they want to highlight that to their investors. On the other hand, they don't want to say it too loud."
Assuming oil companies keep their public statements about all the money they're making modest, there are still several things they can do with their cash. They could spend more to expand their drilling locations, or hire more employees. But most of them have already been signaling to investors that they'll do the opposite.
Oil companies have been undertaking cost-cutting campaigns that include reducing their employee counts. Last year, for instance, Conoco said it would cut 20% to 25% of its global workforce. And U.S. producers have figured out ways to grow production without spending more, by using more advanced fracking techniques, for instance. While producers have added about 10% more drilling rigs on land this year, those rigs have largely been placed by private operators, analysts say.
Dividends are another option. Most energy companies have been boosting their dividends in recent years, becoming some of the most consistent dividend-raisers in the stock market. Among the big players, BP and TotalEnergies stand out for dividend yields above 4%, at a time when the S&P 500's dividend yield is just above 1%. Given this quarter's cash haul, big companies have the financial clout to send more back to shareholders.
Exxon Mobil, for instance, is expected to report $16.1 billion in free cash flow for the third quarter, almost enough to fund its entire annual dividend payment, which is likely to cost between $17 billion and $18 billion this year. But analysts don't expect oil companies to boost dividends by large amounts this year, despite their cash haul. Once a company establishes a higher dividend level, it will be expected to pay that dividend out in good times and bad.
"Most don't want to raise quarterly dividends too much -- if all of a sudden oil rolls over to $50 a barrel, the last thing you ever want to do is cut your quarterly dividend." In 2020, Exxon had to take on debt to pay its dividend. It doesn't want to repeat that episode.
Oil companies have tried a less-permanent way of sending money back to shareholders before. The last time oil prices spiked, after Russia invaded Ukraine in 2022, firms like Devon Energy used the windfall to pay out variable dividends that they told investors would fluctuate based on the amount of cash flow they were making. But investors didn't reward them for the strategy, and it went away. "Those are off the table," Dingmann said.
Companies could also use the cash to increase share-buybacks. But so far, companies have also balked at vastly expanding their buyback programs. Chevron has told investors it expects to buy back between $10 billion and $20 billion of stock per year, or about 2% to 4% of its market cap. But its purchases this year have tracked toward the bottom of that range, and it told investors it expects to repurchase between $2.5 and $3 billion in the third quarter. With oil company stock prices near all-time highs, companies are reluctant to spend a lot on their own stock.
They could also pay off debt with their cash, which some firms have already begun to do. BP has been particularly aggressive at whittling its debt load, and expects to take its net debt down to $13.5 to $14.5 billion in the current quarter from $22.3 billion in the second quarter. Other companies with debt like Matador Resources and Occidental Petroleum could also pay some of it off. But most energy companies are operating with relatively clean balance sheets today, so there isn't much left to cut.
That leaves mergers and acquisitions as one of the last possible uses. "I do think that it's possible that some companies are saving up cash for dry powder for acquisitions," said Kevin MacCurdy, research director at Pickering Energy Partners. Already, there have been some deals in the oil patch, with producer Crescent Energy buying $4.2 billion worth of Devon Energy's Texas holdings this month. And just this week, natural gas producer EQT announced it plans to buy Range Resources in a deal worth around $13 billion.
Still, analysts expect these deals to be modest. Sellers will be reluctant to part ways with acreage during an oil boom and buyers might not want to pay the premium it would take to take it off their hands. Companies are more likely to buy acreage from each other than to buy entire companies.
Oil companies are flooded with cash today. Don't expect them to go on a spending spree just yet.
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