Earnings roundup: Big oil CFOs brace for inflation, eye demand

Although CFOs in the energy and oil sectors raised concerns about inflation and a potential recession during their second quarter earnings calls, companies in the sector reported results positive – and indeed, record high – for the quarter, as well as confidence in their ability to weather an increasingly likely economic downturn with relative ease.

CFOs across industries are taking a closer look at their companies’ recession preparedness as reports show the Fed may fail to bring inflation down before one hits – study of 900 traders and strategists revealed that 84% think it will take the Fed two years or more to reach its 2% inflation target, for example.

Chevron chief financial officer Pierre Breber acknowledged cost inflation during the company’s second-quarter results on July 29, for example, but said the company was able to offset some of the impact through to “good planning, smart purchasing and good relationships with suppliers”.

During Exxon Mobil’s earnings call the same day, Chief Financial Officer Kathryn Mikells expressed similar sentiments, acknowledging that Exxon is “obviously not inflation-proof.” However, she also noted that “we feel really good about the way we’ve been handling inflation so far” in response to questions from analysts.

Exxon generated record profit of $17.9 billion for the second quarter of 2022, compared to $5.5 billion the previous year. Chevron, meanwhile, reported earnings of $11.6 billion for the quarter, down from $3.1 billion in the second quarter of 2021.

Collectively, Chevron, Exxon Mobil and Shell Oil reported a profit of $46 billion in the second quarter, driven by soaring energy prices and shrinking oil refining margins, according to a Wall Street report Journal of July 29.

While oil and energy companies were able to carefully avoid some of the impacts of inflation during the quarter, their CFOs are also closely watching consumer and supplier demand, which continues to rise. energy prices have prompted action by consumers, government officials and other businesses.

High fuel prices can also impact the ability of industries such as food to hedge against inflation, increasing the likelihood of a recession – Walmart executives, for example, have noted that the The retail giant faced cost pressures from fuel prices and supply chain difficulties among others in its latest quarterly results.

A favorable wind for consumers

The combination of rising food and fuel prices has had an effect on consumer habits. More than two-thirds of Americans have changed their driving habits since March in response to soaring gas prices, with the majority choosing to drive less, according to a July 22 study by the American Automobile Association (AAA). Two percent of Americans said they bought electric vehicles (EVs) to cope with soaring gas prices, according to the study.

Government incentives for electric cars have also been included in the Cut Inflation Act recently signed by President Joseph Biden, which will both help lower costs for consumers and boost manufacturing, Energy Secretary Jennifer Granholm said in statements in August. 21.

The U.S. government has taken several steps to try to mitigate high pump prices, including releasing 1 million barrels a day from its reserves, Granholm said, but the government is also “at the whim, if you will, of what is happening in the world”. concerning oil as it is traded on the world market. Gasoline prices have risen steadily over the past several months, but have since come back down to average around $4 a gallon.

Consumers may be considering electric vehicles or opting for public transport, but demand is still on the rise in other areas such as air travel. For his part, Berber predicted that demand “will be much more recession-proof going forward” during the July 29 earnings call, for example.

“In terms of tailwinds, we still have very low unemployment, and we have a consumer who wants to spend money to go out and do things that they haven’t been able to do for a few years,” Breber said. about the possibility of recession. “When prices were higher in the second quarter, they made choices. And if you look at this demand response on gasoline, it’s in line or even higher than some past recessions[s]. So it’s not clear. »

Competitor Exxon is also “preparing for all eventualities,” Mikells said on the earnings call, but also pointed to air and air travel as well as an area where demand has slowly started to pick up again.

“Overall, when you look at demand recovering from pandemic lows…one of the laggards has been the jet, obviously,” Mikells said. “And so the jet is still falling behind but obviously starting to pick up now that people are starting to travel and obviously the international travel restrictions have come down which means people are also starting to travel a bit more internationally as well. international.”

Energy CFOs are always on the move to make sure they can withstand inflation where it is. Occidental’s chief financial officer Robert Peterson said on the company’s earnings call that due to “higher inflationary pressures than others” in the Permian Basin, the company will reallocate $200 million from capital to the region to deal with “the regional impact of inflation”, for example. The company reported net income attributable to shareholders of $3.6 billion when it reported results Aug. 2.

Peterson still expects to see strong results for the remainder of 2022, although conditions may not remain as favorable in the second half, he acknowledged during the company’s second quarter earnings call. ‘company.

“We still see the possibility that market conditions will ease from where we are today due to inflationary pressures, although long-term fundamentals continue to remain supportive, and we expect third and fourth quarters are strong by historical standards,” he said.

About Wesley V. Finley

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