What will happen when oil companies release earnings?

The Western world s biggest oil companies likely just generated more cash than at any time since the Great Recession, and investors are about to find out what they ll do with it.

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The five supermajors - starting with Royal Dutch Shell Plc and TotalEnergies SE - who release earnings on Thursday - will report about $29 billion in free cash flow combined in the third quarter, according to analysts estimates compiled by Bloomberg. That would be the most since the beginning of 2008 - the most since then. Strong demand for crude, surging prices for natural gas and chemicals, and a rebound in the refining business are likely to be the main drivers.

An upbeat set of results would help cement a remarkable turnaround after a painful 2020, in which Big Oil was forced to cut costs and employees, shelve spending plans and take on debt. Shell and BP Plc even resorted to cutting their vaunted dividends. Shareholders are now anxious to see whether the companies will return their windfalls via higher dividends or stock buybacks - or use them to produce more oil and gas.

We re seeing really strong results on the free cash flow side, said Noah Barrett, a Denver-based analyst at Janus Henderson Investors, which has $428 billion under management. But on the earnings calls we need to hammer on whether it s sustainable or whether the majors are starving the core business of capital. Exxon Mobil Corp. and Chevron Corp. report on Friday, with BP bookending the results on Nov. 2.

Executives at publicly traded oil companies have so far this year been keen to reinforce their commitment to spending discipline, even in the face of soaring commodity prices that would have prompted a raft of new megaprojects in previous boom cycles. Instead they re focused on paying down debt and returning cash to shareholders after a decade of weak financial performance even before the pandemic, plus emerging risks posed by the energy transition.

As such, Goldman Sachs investors will be focused on the path forward for incremental shareholder returns this quarter, Exxon analysts wrote in a note. Morgan Stanley also has the potential to increase its share buyback, according to Chevron. BP could announce $600 million worth of incremental buybacks in the third quarter, while Shell might hold off on further repayments until the final quarter of the year, Jefferies analyst Giacomo Romeo wrote in a research note. France's TotalEnergies has already promised to buy back $1.5 billion of shares in the fourth quarter.

Still, buybacks and dividends aren t the only option for all that cash. With Europe and Asia short of gas, and the U.S. and India calling on OPEC to produce more oil, the profit incentive to drill for more fossil fuels is increasing as the majors plan their 2022 capital budgets. Executives should be cautious in overcommitting to shareholder returns because the good times might not last, according to HSBC.

As strong as the near-term financial outlook is for the sector, we aren t convinced the oil and gas prices driving the latest rally are sustainable, London-based analyst Gordon Gray said in a note citing continued valuation headwinds over energy transition risks.

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None Average European gas prices almost doubled quarter on quarter, while in the U.S. Henry Hub jumped 45%.

None Exxon signaled a gain of about $700 million from natural gas in a Sept. 30 trading update None

None Gulf Coast crack spreads increased 11% quarter on quarter, while in Europe they rose 16%, according to Morgan Stanley.

None Exxon s downstream division should end four consecutive quarters of losses.

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None Higher natural gas liquid-input costs may erode chemical margins from the second quarter, but demand remains high for petrochemicals that go into plastics, benefiting Exxon and Shell in particular.

None Gulf Coast prices for PVC, used in water pipes and window frames, touched a record high in the second quarter of the second quarter.

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None Shell and BP have vast trading operations that can add billions to their bottom lines every year.

None Shell appears to have been on the right side of big swings in gas and power prices, with the company flagging that its gas trading desk performed better than in the second quarter of the same period.

None BP hasn t disclosed any updates on its trading unit, but its gas and power desks did get off to a good start this year due to a winter freeze in Texas that sent prices soaring.

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None Brent crude averaged $73.26 a barrel in the second quarter, compared with $69 a barrel in the third quarter.

None production from the Gulf of Mexico took a major hit when Hurricane Ida damaged key oil infrastructure, forcing some facilities to shut down for weeks.

None Oilfield servicers Baker Hughes Co. and Halliburton Co. suffered earnings knocks due to the hurricane.

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