Exxon/Chevron: energy stocks still have gas left in the tank

Big Tech’s pain has been Big Oil’s gain. High oil and gas prices have squeezed consumer wallets. Large companies’ cuts to cloud and advertising budgets are causing tech sector angst. But for energy producers, it has been another quarter of record-busting profits.

US supermajors ExxonMobil and Chevron raked in nearly $31bn in combined net income during the third quarter. That is more than twice what they brought in a year ago. Exxon posted the highest profit in its 152-year history, while Chevron announced its second-best quarterly result ever. Their earnings follow a string of similarly strong results from European energy groups earlier this week.

At Exxon and Chevron, the windfalls were driven by higher oil production and natural gas prices, along with strong earnings from their “downstream” oil refining businesses. Both have their best balance sheets since at least 2014, when crude prices also traded in triple digits.

Energy stocks have outpaced the wider market this year. The S&P 500 energy index is up 61 per cent, compared to the tech index’s 26 per cent decline. Yet the oil sector trades on just nine times forward earnings — about half of its pre-coronavirus pandemic levels. Yet tech stocks still command a multiple of around 21 times, despite slowing revenue growth and profit declines.

Success breeds scrutiny. US president Joe Biden, who in June accused Exxon of making “more money than God”, blames oil companies for fanning inflation. In both Europe and the US, calls grow for a windfall tax on the sector’s record profits. Meanwhile, costs should swell as oil service companies look to pass on their higher operating expenses to their clients.

For those willing to invest in oil, Chevron and Exxon remain good bets. Their strict capital discipline stands in stark contrast to the tech sector’s profligate ways. Assuming oil prices hold up given the boycott of Russian oil and Opec’s production cuts, they will remain reliable cash gushers for another year.