Oil companies are amassing a ton of cash as oil prices top $80 a barrel. Exxon and Chevron have reported record profits, but they’re also sitting on huge piles of money. Exxon has $36 billion in cash according to its third quarter earnings report, while Chevron has $22 billion. The industry is expected to bring in an average of about $90 million for every dollar increase in the price of crude oil, so you can see why these companies are earning big bucks.
The oil industry isn’t just rolling in cash, either. According to the Wall Street Journal, Exxon and Chevron have “been spending much less this year than they earn.” That’s called investing or saving money, depending on who you ask. The oil conglomerate has been using that money to pump up the price of its stock, which is also doing pretty well for itself.
The Journal points out that Exxon’s return on equity is at a five-year high because it has plenty of cash and low debt. In other words, Big Oil companies aren’t just earning money off oil sales — they’re also looking for ways to make money off of their huge piles of cash.
That brings us to the next question: What are they doing with that money? Here’s where it gets interesting. Last week, an Exxon spokesman said the company doesn’t pay out dividends to shareholders because it has numerous opportunities to invest in profitable opportunities around the world.
So, in other words, the oil giant is holding onto its cash because it wants to make more money later on.
But what kinds of investments could Exxon be looking for? Last month, President-elect Donald Trump named Exxon CEO Rex Tillerson as his pick for secretary of state. Tillerson has a real working man’s perspective on the oil industry. In 2014, he said:
We invest in oil and gas development as we would any other financial asset. … High oil prices do create temporary wealth for producers and countries that produce and sell into that high-price market, but don’t count on it to fill government coffers over the long haul. This is not a Congress-created royal miracle. High oil prices followed by low oil prices is not new, except to some in the press.
What Tillerson is referring to here is that oil companies can’t just keep putting money into expensive projects and expect to make it back when the price of crude goes down. When times are tough, all businesses have to tighten their belts or close shop. The oil industry is no different, so spending less on exploration right now to make more money later makes sense.
According to the Wall Street Journal, big oil companies are also putting their cash toward stock buybacks. They can either use that money to fund acquisitions or just increase their dividends to shareholders. Some company executives have said they’d like to buy back their own stock – and that they’re thinking about ways to do it – after the Republican tax plan is finalized.
So if you’re an Exxon shareholder, you could be seeing a bit more cash in your pocket sooner than later — even though that oil tanker may not be making weekly trips just yet.