Trick Follows Treat For Big Oil As Biden Pushes New Tax On Windfall Profits

Big Oil is accustomed to politicians tagging them as the bogeyman. But a presidential condemnation on Halloween seems a little too on the nose.

Treat, then trick! A couple weeks ago President Joe Biden said he would refill the U.S. Strategic Petroleum Reserve at a $70 per barrel price floor. Today, in contrast, he is set to float today the idea of imposing a windfall profits tax on energy companies.

According to an AP source within the administration, Biden’s remarks will address “reports over recent days of major oil companies making record-setting profits even as they refuse to help lower prices at the pump for the American people.”

They must be referring to ExxonMobil
XOM
, which notched a record quarter with $20 billion in net income. Chevron
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saw a slight dip at $11.2 billion, while Shell made $8.3 billion.

Big Oil is accustomed to politicians tagging them as the bogeyman. But a presidential condemnation on Halloween seems a little too on the nose.

Biden has been telegraphing this move. On Friday the President tweeted, “Can’t believe I have to say this but giving profits to shareholders is not the same as bringing prices down for American families.”

“Oil companies made billions in profits this quarter,” tweeted Biden on Saturday. “They’re using these record profits to pay out their wealthy shareholders instead of investing in production and lowering costs for Americans. It’s unacceptable. It’s time for these companies to bring down prices at the pump.”

The administration has reportedly been studying windfall profits taxes since June, when Biden complained “Exxon made more money than God this year.” Since July the average price of gasoline nationwide has fallen $5 a gallon to a recent $3.76, according to AAA.

On the quarter, Chevron paid $2.7 billion in dividends and bought back $3.8 billion in shares. Were those funded with an illicit windfall? Chevron said that a big contributor to its outperformance in the quarter was its international gas business — where demand for liquefied natural gas shipments has surged as a replacement for Russian gas. Europe needed gas so bad that it was willing to pay the equivalent of more than $300 a barrel of oil to get it. Is that price gouging? That price was sufficient incentive to attract so many supplies, including LNG tankers redirected from China, that by mid October all of Europe’s gas storage caverns were full and the price of gas briefly fell to zero because traders ran out of places to put it. Chevron’s capex will be around $15 billion this year.

ExxonMobil CEO Darren Woods said last week that key to their results was “rigorous cost control” paired with continuous investments throughout the pandemic downturn, with a focus on higher margin products. And workforce attrition. Exxon’s high growth oilfields are in Guyana and the Permian Basin of west Texas. Exxon is investing roughly $22 billion this year.

Congress would still have to approve any new taxes on energy giants. But it’s still scary for them to think about. Analysts at Cowen
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& Co. note that such moves are to be expected in times of spiking prices. They estimated recently that the major oil companies will end up forking over around 6% of free cash flow next year in the form of windfall profits taxes. European countries began instituting windfall taxes months ago.

So President Biden, who recently admonished U.S. oil companies “to deploy these record-breaking profits to increase production,” will now propose a special tax on those profits so that will no longer have as much money to invest in increasing production, or in delivering emergency gas to Europe. Exxon produces 3.7 million boepd. Chevron 3 million bpd.

To be sure, the threat of confiscatory taxes discourages marginal investment and encourages accelerated return of capital to investors. The Congressional Research Service has even said a windfall tax would have “adverse economic effects.”

But it’s fun to hate on Big Oil. Biden may be taking his cues from California Gov. Gavin Newsom who has proposed a windfall profits tax. California has already mailed out rebate checks to make up for having the highest fuel prices in the nation — a result of laws that mandate California gas stations can only sell special low-emissions blends that are harder to refine, especially when the state makes it difficult to invest in improving refining operations. No wonder oil companies have sold off thousands of old oil wells in the state.

Some companies want to reward shareholders as quickly as possible. Pioneer Natural Resources
PXD
of Midland, Texas returned $1.86 billion last quarter, in excess of its $1.73 billion in cashflow. This is only possible due to historically low levels of debt in the industry. In recent years as institutional investors became more concerned about divesting from fossil fuels than investing in them, capital has flowed away from the energy giants. Given oil and gas futures prices, most oil companies will generate more than enough cash over the next four years to pay off their debt entirely or return capital in other ways. According to Cowen, they will need just $75/bbl oil to have enough free cash flow left over to fund buybacks of 6% of their share count. Unfortunately that leaves plenty of protection money leftover for Uncle Sam.

Shell received special attention from President Biden last week, after it reported earnings of $8.3 billion and an expanded $4 billion share buyback. “That’s more than twice of what they made in the third quarter of last year, and they raised their dividends as well, so the profits are going back in their shareholders instead of going to the pump and lowering the prices,” Biden said at Syracuse, New York event.

But the king of the capital returners is ExxonMobil, which earmarks buying back $15 billion in shares, and paying out another $15 billion in dividends. Given broad ownership of ExxonMobil stock, CEO Woods was kind of right last week when he said that Exxon’s largesse represented a return of “profits directly to the American people.” Plus, given the new 1% tax on corporate buybacks included in the Inflation Reduction Act, Exxon will already be paying an extra $150 million.

But that’s not what Biden is looking for. Biden needs a bogeyman to take the blame for high gas prices (so voters don’t blame him for stifling federal support for permitting and drilling). A deep pocketed one that can pay penance for the misdeed of supplying the world with reliable energy during times of shortage.

Are oil investors scared of the president’s threats? They don’t appear to be. Shares of Exxon and Chevron were both up more than half a percent in midafternoon ahead of Biden’s speech. Because although the electorate will eat up the pre-election rhetoric, the windfall profits tax will never pass Congress.

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