Oil & gas firms’ profits set to smash records reaching $834 billion in 2022, Rystad says

Energy intelligence group Rystad Energy expects public exploration and production (E&P) companies to break prior records as profits are set to soar in 2022, driven by high oil and gas prices and increasing demand, reaching a 70 per cent increase compared to the figures recorded in 2021.

As reported by Rystad, public E&P firms are on track to shatter previous record profits this year as high oil and gas prices and surging demand drive financial success. According to the energy intelligence firm, companies’ cash from operations after accounting for outflows and asset maintenance – total free cash flow (FCF) – will balloon to $834 billion from the $493 billion profits in 2021.

Espen Erlingsen, Rystad Energy’s head of upstream research, remarked: “The current financial health of public upstream operators is at an all-time high. Still, the good times are set to get even better this year, thanks to a perfect storm of factors pushing profits and cash flow to another record high in 2022.”

Rystad Energy research shows that the total FCF from public E&Ps fell to around $126 billion in 2020 as a result of the Covid-19 pandemic and the ensuing oil price collapse, halving the prior year’s total. Last year’s FCF levels surged to nearly $500 billion – the highest profits ever for the upstream industry – as the global economy rebounded and fuel demand increased.

Based on Rystad’s research, the main contributing factor to these glowing financials is sustained high oil and gas prices. The energy intelligence group predicts that total FCF for public upstream companies will reach $834 billion this year thanks to average Brent oil prices estimated at $111 per barrel in 2022, a Henry Hub gas price at $4.2 per thousand cubic feet (Mcf) and a European gas price of $25 per Mcf.

However, the research shows that record high FCF is not the only thing on the table for public upstream operators as cash from operations is also expected to rocket this year, breaking the $1 trillion threshold for the first time. The $1.1 trillion projected annual total is a 56 per cent jump from 2021 levels of $719 billion, which was the highest yearly total since 2014.

Rystad explains that cash from operations is typically used to fund new investments and financial costs, such as debt payments and dividends. In 2020, cash from operations dropped by almost $200 billion, or around 35 per cent, implying that companies had less money to finance new activity and issue payouts to their owners. As a result, investments also dropped in 2020, falling by almost $100 billion or around 30 per cent.

As elaborated by Rystad, despite the robust growth in cash from operations, investments are not expected to grow significantly this year, inching up to $286 billion from $258 billion in 2021. The investment ratio shows the disparity between record cash flow and profits, and the portion of those windfalls that are reinvested, as this ratio has fluctuated during the past decade, averaging around 72 per cent. However, the projected investment ratio this year is expected to plunge to 26 per cent, the lowest since the early 1980s.

Furthermore, the meagre investment ratio and soaring FCF indicate that public E&P companies will have significant cash available to pay down debt or fork out dividends to shareholders, Rystad forecasts. As much of last year’s profit was spent on reducing debt, this has left upstream operators in a very healthy financial position and the upshot of this is that a significant portion of the vast profits anticipated this year will likely be paid out to shareholders.

Rystad further adds that almost all the large public E&P companies will have an investment ratio between 20 per cent and 30 per cent in 2022. As an example, the energy intelligence group states that Occidental Petroleum has the lowest ratio of about 20 per cent, while ExxonMobil is expected to see the most significant increase in FCF in 2022, growing by about $18 billion.

On the other hand, Rystad points out that Hess is an outlier among these companies with an investment ratio of around 45 per cent, due to the company’s plans to ramp up investments in Guyana and the core U.S. shale patch of the Bakken.