Oil majors raked in big bucks in 2022. It was a great year for oil and gas profits.
ExxonMobil Corp made a whopping US$55.7 billion in earnings for the full year, up from US$23 billion in 2021 – a US$32.7 billion increase. The large swathes of revenues accrued because of high oil prices, driven by the Russia-Ukraine war.
But in 2023, things are looking a bit different; oil prices have skidded, and one analyst said it threatens the profitability of producers like Exxon. The Asian Investor on Seeking Alpha – a crowd-sourced content service provider that publishes news on financial markets – said: “I believe ExxonMobil faces continual earnings and free cash flow pressure in the foreseeable future which should then also likely translate to a lower valuation multiplier.”
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To support his point, the Seeking Alpha analyst noted that Exxon’s profitability has been declining due to the end of the boosting effect of the war in Ukraine and European sanctions on Russian natural gas prices. But the company is still profitable and reported adjusted profits of US$11.6 billion in Q123, which is lower than the previous quarter’s US$14 billion. The production segment’s profits dropped by 25% in Q123, mainly because of lower average market prices.
Its free cash flow, tells of the other side of things.
He explained that Exxon generated US$11.4 billion in free cash flow (FCF) in Q1 – a significant amount for any quarter. However, it was the second consecutive decline in FCF since the company reached a record of US$22 billion in Q3 of 2022.
“Since reaching this peak, ExxonMobil’s free cash flow has dropped off almost 50% and I expect continual pricing weakness as the risk of a recession is growing and inflation still remains a considerable challenge for consumers,” he noted further.
According to the analyst, Exxon’s earnings and FCF are at risk from potential declines in petroleum and natural gas prices due to an impending economic recession. However, if a recession is avoided, the company’s earnings and FCF could improve.
Exxon is currently the operator of Guyana’s offshore Stabroek Block, where 11 billion barrels of recoverable oil equivalent barrels have been discovered.
