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Impact of Inflation, ESG, and Investors on the Oil & Gas Industry

Jun 30, 2022
Kaisee Littlejohn

The largest oil and gas companies in the U.S. recently brought in more money than at any point since the Great Recession. In 2022, it is anticipated that public exploration and production companies' free cash flow will set a new high of $834 billion. Oil and gas producers are on the verge of recovering losses they’ve incurred over the past decade.

The pandemic caused CEOs to reduce production and spending, while shareholders urged the oil and gas sector to become more financially responsible. Now that oil prices have risen beyond $100 per barrel in large part due to the conflict in Ukraine, the business cycle has shifted dramatically.

Companies are giving much of this money back to their shareholders in the form of stock buybacks and dividends, including the recent introduction of variable dividends. Companies are also using this time to think about their ESG initiatives and increasing investor pressure to have a plan for energy transition. As inflation continues to rise, prices remain high yet extremely volatile, as the market is always changing.

The Impact of Inflation

Fuel price increases are predicted to bring the price of gasoline in the U.S. to more than $6 per gallon by August, setting a 40-year record for inflation. Because of this possibility, some officials contend that the industry's emphasis on returns benefits a select few at the expense of consumers.

Nearly 60% of respondents in a recent Federal Reserve Bank of Dallas survey of executives from more than 100 oil and gas companies stated that "investor pressure to maintain capital discipline" was the key consideration impeding the expansion of production, which would lower prices. These factors raise questions about whether U.S. fuel consumption can withstand higher prices for much longer. Without an adequate supply response arriving in the near-term from either crude oil production or refining capacity, demand destruction may be the only variable that can cause the fuel price surge to slow and reverse.

With a supply-driven price shock like the current one, there is a risk due to price inelasticity that fuel prices could reach a level where consumers cut spending on other items, posing a risk to the broader economy.

A few refineries are considering expansions and taking other actions to improve output, including postponing maintenance projects that would have temporarily shut down some operations, according to Bloomberg News reports. For instance, to meet demand, Valero cancelled a planned 30-day closure of a crude unit at its Memphis, Tennessee refinery.

The Impact of ESG

Concerns about the future demand for oil and gas are being raised by investors. This uncertainty has influenced different opinions on the part that oil and gas businesses can play in the energy transition. While some people think oil and gas corporations should invest in renewable energy sources and shift away from fossil fuels, others think it is more prudent for these businesses to return free cash flow to their investors. Given the different regulatory environment in which U.S. companies operate and the various political pressures they face, many investors cited the more progressive strategies and actions of European companies (such as Shell, Total, and BP), but expressed caution about advocating for a similar path.

While some view ESG as being difficult to adopt and a potential profit-killer, the reality is that many companies who implement ESG programs, particularly those in the oil and gas industry, experience the opposite effect. Energy exploration and production (E&P) businesses have a lot of options for achieving ESG objectives that go far beyond their final product.

To be effective, the leadership of a company must be committed to raising its ESG profile. Efficient ESG reporting requires a human capital investment, which can be difficult to find for smaller firms. However, the costs associated with ignoring ESG issues may be far higher.

The Impact of Investors

Approximately $9.51 billion was returned to investors by businesses in the first quarter of 2022, according to energy research firm Wood Mackenzie. Oil and gas companies are returning cash to their investors by both buying back stock and implementing the “variable dividend,” which is based on cash flow. The introduction of this dividend has made oil and gas stocks much more appealing over the last year or so and has become a trend among oil and gas corporations.

Shell, ExxonMobil, BP, Chevron, and ConocoPhillips, the top five oil companies, had a more than 300% increase in profits compared to the first quarter of 2021. In just three months, that amounts to total profits of more than $35 billion. In fact, the first-quarter profits of these five corporations alone are close to 28% of what Americans spent on gas during that same period.


With investors currently experiencing higher-than-expected returns and corporations experiencing record-high profits, both parties should speak to their tax advisors regarding any potential tax implications, planning considerations, and entity structures to optimize cash flow and efficiency. As investor pressure regarding ESG initiatives rises, companies should consider investing in their ESG profile.

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