Oil prices extended gains on Thursday benefiting from the extension of production cuts by Russia and Saudi Arabia through to the end of 2023 despite a mixed economic outlook.
Goldman Sachs Commodities Research said last week that the oil supply cuts could lead to Brent crude jumping as high as $107 a barrel in 2024.
How oil prices impact energy stocks
Yousef M Alshammari, chief executive and head of oil research at CMarkits, noted that all of these companies saw a jump in their stocks in August following the rally in oil prices.
“Brent is trading 23% higher than its July levels and it’s expected to gain further rise towards the end of the year supported particularly by the extension of the Saudi-Russian voluntary cuts,” he said.
“This means that we are likely to see improvements in financial performance of such companies as we move towards Q4 this year.”
Moreover, the energy sector is the S&P 500’s (^GSPC) best-performing segment this quarter. Last year, the sector was the only segment of the S&P 500 to end with gains after Russia’s invasion of Ukraine sent oil prices higher.
Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, told Yahoo Finance UK: “The soaring oil price is sending the share prices of major oil companies upwards.
"When the price of the black stuff is squeezed skywards, it’s essentially a licence for oil majors to grease their free cash flow and also allows further investment into renewables research and development.
"Of course, not all the oil and gas giants are attacking future-thinking energy solutions with the same gusto, but it’s well understood that those who aren’t are in far more precarious positions when it comes to longevity and retaining investor interest.”
Lund-Yates said the market is also well-tuned to the fact that oil prices are cyclical, and that they will turn.
“That’s why although there have been positive moves from the likes of ExxonMobil, BP and Shell, the changes haven’t been overly dramatic. The prices of these companies will remain sensitive to developments from OPEC+, and a further extension of production cuts could see oil’s value climb further – and of course, the opposite is also true.”
Russ Mould, investment director at AJ Bell, said: “It is, if you will pardon the expression, a crude generalisation, but the higher the oil price goes the better oil stocks tend to perform.
"Higher crude prices mean higher profits and – usually – higher cash flow as a result, and higher cash flow can mean more generous dividends or buyback schemes."
However, he also noted that oil companies often have downstream operations, too, and oil is an input cost and feedstock for those refining petrochemical and chemical operations, so higher prices can have a negative effect upon profit margins here.
In addition, he noted, the oil majors can have gas exposure too, with Europe's Dutch TTF prices falling this year after the spike in 2022 prompted by the Russian invasion of Ukraine.
Top five oil and gas stocks
Here’s a quick look at how some of the biggest oil and gas stocks have performed over the last few months.
In the last six months, ExxonMobil gained 7.15%, rising 2% in the last month.
Exxon’s share price climbed nearly 17% in the year to 11 September.
At the end of July, the company said its profit fell 56% in its second-quarter results, joining rivals hurt by the decline in energy prices and lower fuel margins following a bumper 2022, when Russia's invasion of Ukraine sent oil and gas prices soaring.
Excluding last year's record second quarter, however, Exxon posted its strongest result for the April-to-June quarter in more than a decade, helped by cost cuts and the sale of less profitable assets.
Meanwhile, net quarterly income was $7.88bn, or $1.94 per share, versus a record $17.85bn a year earlier.
However, the company’s chief executive said at the time that he expects record oil demand this year and next, and that this may help boost energy prices in the second half of the year.
On 28 July, Exxon declared a third-quarter dividend of $0.91 per share, which was paid on 11 September.
Meanwhile, BP’s share price has risen nearly 13% in a year.
On Monday, Zachs Equity Research said shares have outperformed the industry in the past three months with BP stock gaining 11.2% compared with the industry’s 8.1% growth.
Investors will be watching its stock today, however, after the energy giant’s chief executive Bernard Looney resigned on Wednesday amid a review of his personal relationships with colleagues.
The oil and gas firm said Looney, who had led the company since 2020, was stepping down with immediate effect and said it recently started an investigation into alleged relationships he had with colleagues, the second in two years.
The firm also said he had admitted he was not "fully transparent" initially.
"The company has strong values and the board expects everyone at the company to behave in accordance with those values," a spokesman said.
"All leaders in particular are expected to act as role models and to exercise good judgement in a way that earns the trust of others."
BP’s chief financial officer Murray Auchincloss is acting as chief executive on an interim basis.
In BP's second quarter results on 1 August, it announced a dividend per ordinary share of 7.270 cents, an increase of 10%.
Over the last six months, Shell’s share price has risen nearly 3% and is up around 8% on the year.
On 27 July, the company posted net profits of just over $5bn for the three months to the end of June, a drop of more than 50% on the $11.5bn reached in the same period the in 2022.
The figures came as oil and gas prices fell from the highs seen in the wake of Russia's invasion of Ukraine.
Brent crude peaked in June 2022 at $122 a barrel. Whilst it is currently trading around the $90 mark, it had been nearer $75 during Shell's most recent reporting period.
Natural gas costs and prices also surged after Russia heavily reduced supplies to Europe, forcing the continent to source alternative energy supplies.
On 4 September, the Shell board announced the pounds sterling and euro equivalent dividend payments in respect of the second quarter 2023 interim dividend, which was announced on July 27, 2023 at $0.331 per ordinary share.
Chevron stock has gained about 3.18% over the last six months, and a marginal 0.78% in a year.
At the end of August, the US energy firm reported lower earnings for the second-quarter of 2023 compared to the same period of 2022, joining the other oil and gas majors in posting reduced profits on the back of lower oil and natural gas prices in 2023.
The company said its adjusted earnings were $5.8bn, more than half the adjusted earnings of $11.4bn, reported for the second quarter of 2022.
Meanwhile, it said sales and other operating revenues fell to $47.2bn, from $65.4bn the previous year, primarily due to lower commodity prices.
Chevron's quarterly dividend amount is currently at $1,51 with an annual dividend yield of 3.63%.
Saudi Arabian Oil Company (2222.SR)
Saudi Aramco stock has taken off this year, gaining nearly 17% in 2023, as the company, which is the largest oil producer in the world, warned in January that the global oil market was tight and said spare capacity was extremely low.
Saudi Aramco’s second-quarter results were also impacted by weaker oil prices compared to 2022, with its profit down by almost 40%.
The company remained highly profitable despite the loss, with a net income of $30bn last quarter.
Saudi Aramco's current quarterly dividend is listed at 0,34SAR with a 4% annual dividend yield.
The International Energy Agency (IEA) said demand for oil, natural gas and coal will peak this decade due to the growth of renewable energy with large fossil fuel projects running the risk of becoming stranded assets.
In a bid to safeguard their future businesses, oil and gas majors have widely published updates showing the sustainable steps they are taking to engage with the energy transition.
However, the current wave of green initiatives presents a challenge to the traditional business model of the oil and gas industry. On one hand, the companies seem to be taking it seriously, as evidenced by commitments to reducing carbon emissions and investments in negative-emission technologies such as carbon-capture usage and storage.
However, moving forward, these companies will have to be willing to substitute profit-making for climate change — which is likely to also make them profit, although it will likely impact the overall bottom line.