Earnings season is here, and companies across the board are reporting in.

In this week's episode of Industry Focus: Energy, Motley Fool energy analysts Sean O'Reilly and Taylor Muckerman dive into the most important takeaways from big players like ExxonMobil (NYSE:XOM) and Phillips 66 (NYSE:PSX); why so many oil companies are increasing or maintaining their dividend even while the industry struggles; how dividends and buybacks play into shareholder value; and more. Also, the hosts look at changes in the price of oil this week and what's behind them, new gas tax legislation that'll likely be coming out of South Carolina soon and what it will mean for the state, and more.

A full transcript follows the video.

This video was recorded on May 11, 2017.

Sean O'Reilly: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Thursday, May 11th, 2017, so we're talking about energy, materials, and industrials. I'm your host, Sean O'Reilly, and joining me in studio is the man that brings a love of energy stocks as well as professional soccer to a whole new level. What's up, Mr. Muckerman?

Taylor Muckerman:
Hey, buddy.

O'Reilly:
How's it going?

Muckerman:
It's not too bad.

O'Reilly:
What's your favorite soccer bar in D.C.? I know you told me.

Muckerman:
There's couple in Arlington. You have the old-school Summers. It was going to close down because rent was going to be jacked up so high --

O'Reilly:
That's happens a lot around here.

Muckerman:
So, they put the signs up one December ago, the year before this last December.

O'Reilly:
What did the signs say, "Our landlord is mean"?

Muckerman:
"Sorry, we're going to be closing, escalation of rent, blah blah." But then the patrons caused such an uproar that the landlord didn't jack up the rent and left it open. It's been open since the '70s or '80s.

O'Reilly:
I also live in Arlington, and I see it where, when rent gets jacked up, a restaurant leaves, and then it's vacant for a year. And I'm like, "You could have bought a house with the rent that you missed out on here." 

Muckerman:
I know. There's a lot of things going on in the Arlington restaurant scene that causes these places to go vacant. But, yeah, not Summers. They've built a faithful following.

O'Reilly:
Yeah, you guys turned the ship. Good for you. Fight the power.

Muckerman:
Benfica clenched the Portuguese League over the weekend. SLB, baby.

O'Reilly:
[laughs] I'm so glad I said what I said, because it's so true. So, today, we're going to do the obligatory oil and gas earnings review, because it's what we do. We're going to dive briefly into gasoline taxes, which may or may not be going up depending on if you live in a certain state, stay tuned.

Muckerman:
Or may have already gone up.

O'Reilly: Well, it's over six years. And, really quick, before all that, what is up with oil prices? Do you see what happened yesterday?

Muckerman:
Had a good day yesterday.

O'Reilly:
A little bit. We've had a rough couple of weeks.

Muckerman:
Any pop is a good pop these days.

O'Reilly:
Oil has been in a downtrend, for our listeners who may or may not be aware, as U.S. production keeps going up in spite of statements by OPEC that they will likely cut production for another nine months. The Saudi Aramco IPO is my only explanation.

Muckerman:
Shale has them in an arm bar right now, ready to choke them out.

O'Reilly:
Like we talked about last week, U.S. production is almost back to where it was at the peak in the summer of 2014. I think it was 9.6 million barrels back then, we're up to 9.3 after an 8.4 bottom. Anyway, prices of West Texas Intermediate rose as much as 4%, I think they settled at 3%.

Muckerman:
Yeah, I think they closed at 3%.

O'Reilly:
On news of a surprise domestic inventory draw from the EIA of 5.4 million barrels, I think they're projecting a couple hundred thousand increase, who knows, as well as statements by Saudi Arabia that production, they might cut into the first quarter of 2018.

Muckerman:
And you had a couple of the countries come out in support of that yesterday.

O'Reilly:
You can smell the desperation from those guys. Maybe it'll work?

Muckerman:
It hasn't worked yet.

O'Reilly:
Yeah. We'll wait a while. But we've been talking about this for two years. We started doing this together, and this was like, "Oil prices just fell 50%."

Muckerman:
Why are we even doing this show? [laughs] 

O'Reilly: [laughs] Yeah, actually, we should make this the industrials show, not the energy show.

Muckerman:
This is like when Motley Fool Pro started in the depths of the financial crisis.

O'Reilly:
Yeah, it's like, nobody is going to do this.

Muckerman:
But, if you look at it now, it's crushing the market, and so are we.

O'Reilly:
That's right!

Muckerman:
We've been way out ahead of this telling people to cool their jets, oil prices aren't going anywhere fast.

O'Reilly:
Cool your jets, because God knows nobody knows what's going on.

Muckerman:
Exactly.

O'Reilly: 
So, we need to do earnings. What do you have for me? I know you had some good ones picked out.

Muckerman:
We'll cover some of the big guys. You had a couple dividend raises, surprisingly.

O'Reilly:
No way, who?

Muckerman:
Exxon, Phillips 66, and Cabot Oil & Gas (NYSE:COG), to name a few. No dividend cuts this quarter so far. That's a good sign. I don't know if they should be raising dividends at the moment, but at least we're seeing some stability here.

O'Reilly:
They're like Bon Jovi, they're "Livin' on a Prayer."

Muckerman:
Very strong for earnings compared to last year. They had some easy comps. And the cost cuts are about fully baked in, so the margins are helping out a little bit there. But Exxon's $4 billion profit was a 122% increase from the first quarter of last year, and they almost doubled cash flow.

O'Reilly: That's what I'm pulling up here, I have to see for myself.

Muckerman:
Yeah, cash flow of $8.2 billion versus $4.8 billion last year in the first quarter. 

O'Reilly:
I have to think, last year, that was helped with the refinery margins. So now, it's a flip-flop of some sort.

Muckerman:
Yeah, but they actually produced less oil on an equivalent oil basis, year over year, of like 5%.

O'Reilly:
Yeah, there it is. Not that I didn't believe you, but cash from operations over at Exxon, over $8 billion, and capex of $2.89 billion. That's $5 billion in free cash flow.

Muckerman:
Yeah. Lowering capex is really helping some of these companies out. You look at Shell, $9.5 billion in cash flow.

O'Reilly:
Long term, that's bad. But for now...

Muckerman:
Yeah, long term, that could be bad. So, you see Shell covering their dividend with cash flow, and being able to do stuff.

O'Reilly:
They bought $3 billion in stock, did you see that?

Muckerman:
Who did?

O'Reilly:
Exxon. They bought back $3 billion in stock in the quarter.

Muckerman:
Oh. That's nothing new for them, to return money to shareholders.

O'Reilly:
Yeah. They've literally said, we'll take on debt to do it. [laughs] Remember when [Fool energy analyst Tyler] Crowe used to be like, "They're just taking on debt and paying it out." I was like ... Exxon is special.

Muckerman:
Yeah, they are special, and they're big enough to be special. If you look at some of the sell-offs that we've had in the last couple years, if you take Exxon and Chevron, they account for 40% of the S&P 500 energy sector.

O'Reilly: Oh my gosh. The stock hasn't even fallen that much.

Muckerman:
No. They're just so dang big.

O'Reilly:
Good for them. Why did you bring up Cabot?

Muckerman:
Cabot Oil & Gas? Because they actually raised their dividend, along with Phillips 66 and Exxon.

O'Reilly:
Oh, that's right, what was up with that?

Muckerman:
I didn't dive too deep into their earnings to be able to tell folks my opinion on whether or not it was prudent. But they're not necessarily as big as the other companies raising their dividend, so it came as a bit of a surprise to me. But you're seeing integrateds, you're seeing refiners, you're seeing upstream oil and gas companies. So, there's a decent mix of companies raising their dividends. But then again, nobody has cut the dividend yet.

O'Reilly:
Well, they did last year.

Muckerman:
This quarter. No, last year...

O'Reilly:
Yeah, Cabot was free cash flow positive. $269 million cash from operations in the quarter, $208 million capex.

Muckerman:
Yeah, you saw it last year, Conoco, Kinder [Morgan], Anadarko, Chesapeake, you name it, they were all cutting dividends last year. 

O'Reilly:
I have to wonder what's going on in these boardrooms. They're just like, "OK, one of the reasons people invest in us is for these dividends, let's call a spade a spade."

Muckerman:
Yeah, for better or for worse, investing in energy is dividend-oriented for a lot of people, yeah.

O'Reilly:
So, they plugged their noses last year, and were like, "OK, we're going to cut. We'll probably get a pass because this is the Dark Ages of oil prices."

Muckerman:
Yeah, "We're not the only company doing it." Some of them didn't get a pass, though. Some of them sold off quite significantly because of it.

O'Reilly: Yeah, and some went under. [laughs] I have to wonder, you see the capex cuts, and that's going to have ramifications long term. They're not finding more oil --

Muckerman:
Not that they're not finding it, they're just not really trying to find it and develop it.

O'Reilly:
Yeah. That money will have to be invested at some point.

Muckerman:
That's what people are saying. There could be a supply crunch in the early 2020s, is what they're saying, because a lot of the projects that folks were investing heavily in in 2013 and 2012 to 2014 are now coming on line, and they're not replacing that pipeline, so to speak. So, there are some worries. It all depends on how demand fares over the next five to six years, though.

O'Reilly:
You brought something up really cool last week, when we were talking about Suncor.

Muckerman:
I did? [laughs] 

O'Reilly:
Yeah, it does happen. Your cool thing this episode was the soccer stuff. But we were talking about Suncor, and how they have really high hurdles for internal returns on projects. And I was like, "Why doesn't everybody do that?" And you were like, "I don't know." It's a fun question.

Muckerman:
I said I don't know in a humorous way because it makes sense.

O'Reilly:
Right. It's just, I would love to see the internal spreadsheets, because you know they all have them. A business has three things they can do with money.

Muckerman:
What's that, Sean?

O'Reilly:
They can invest -- really?

Muckerman:
Tell people.

O'Reilly:
Oh, got it, sorry. "What's that, Sean?"

Muckerman:
[laughs] It's a leading question.

O'Reilly:
If Apple or Berkshire Hathaway or an oil company, anybody, and Berkshire has, what, $96 billion in cash?

Muckerman:
There's a lot.

O'Reilly:
He's trying to catch up to Apple.

Muckerman:
He has to keep some of it for insurance purposes. But, yeah, around half of that or maybe a little bit more is definitely some funny money. Or, fun money, not funny money. It's real, but it's fun. 

O'Reilly:
Yeah, $96 billion is fun. But, bottom line, any company, you can either pay it out as a dividend, they can invest it in operations, or they can buy back stock. I'm including in operations, they're buying another company.

Muckerman:
Yeah, M&A, capex.

O'Reilly:
So, I'm very curious, you saw Exxon bought back $3 billion worth of stock in the quarter, you saw the dividend, they're both increasing their dividends, I want to know, because it requires some judgment as to what you think your stock is worth, to be doing that stuff. And by paying the dividend, you're saying, "We think our investors can make a better return," let's call it 8[%]-9%, or whatever you want to call it. "We're saying that our investors, after taxes, can do better with this money than we can internally." I would love to see what these guys think of all that. If they're doing it just for an obligatory reason, that kind of insults capitalism and such.

Muckerman:
Yeah. Well, Warren Buffett addressed that.

O'Reilly:
He has yet to pay a dividend.

Muckerman:
Yeah, he's yet to pay a dividend. No one that I know of has asked him to pay one, because generally, they trust Warren Buffett.

O'Reilly:
He beats that 8[%]-9% number.

Muckerman:
Yeah. His annual return since Berkshire is like 17%, maybe 21%. Either way, it's crushing the market. But he's getting to that point where he's even starting to question --

O'Reilly:
His ability to do it. And it's a size problem.

Muckerman:
"Maybe I have too much cash to actually find opportunities to help people out."

O'Reilly:
He's still as smart, it's just a size problem.

Muckerman:
Yeah. And because he has a specific benchmark to where he'll buy back stock. It's not like he just wakes up one morning and is like, "I'm going to buy back stock today." It has to be 1.2 times book value, at that level where he's like, "OK, now I'm thinking about it."

O'Reilly:
And it barely got there in the financial crisis, and that was it.

Muckerman:
Yeah. I'm trying to find some numbers on some buybacks that we've seen. Share buybacks, we're looking at almost $160 billion in share buybacks right now.

O'Reilly:
That's crazy.

Muckerman:
Since mid-2010, it's been nothing but up and to the [right]. Back in 2010, it was less than $60 billion annually, or, rolling four-quarter average. Now, you're right around $150 billion.

O'Reilly:
With the market at all-time highs.

Muckerman:
With the market at all-time highs. I guess, yeah, you're buying share prices at higher values. That's going to increase the amount of money you're spending if you're buying a set number of shares. But, yeah, around $90 billion higher. Not that they bought $90 billion over that time period. But that the past rolling four quarters, they bought $90 billion more than they did in 2010.

O'Reilly:
Yeah. In 2010, when all those buybacks started to roll out, I remember Disney announced a huge one and all that stuff, in 2010. I was wondering, "Where was this two years ago?"

Muckerman:
Yeah, you saw the financial crisis, and people just stopped buying back shares. Took a nosedive.

O'Reilly:
That's when you do it!

Muckerman:
They waited until mid-2010, and it just hasn't abated since.

O'Reilly:
Oh well. So, criticisms of corporate America aside, really quick before we head out, gasoline taxes. This is a fun little article you sent me.

Muckerman:
Oh, God, gasoline tax, don't mention it. But we have to.

O'Reilly: The South Carolina House voted Tuesday to approve a legislative compromise plan that would raise the state's 16.75-cent gasoline tax by $0.12 over the next six years.

Muckerman:
That's a hefty increase.

O'Reilly:
It's to pay for roads. 

Muckerman:
You look at it, it's the second-lowest statewide gas tax in the country. 

O'Reilly:
Five lowest is Mississippi at 18.8, Missouri at 17.3, Oklahoma, then South Carolina and Alaska.

Muckerman:
Alaska obviously last at 12.3.

O'Reilly:
Pennsylvania is $0.60 per gallon. That's No. 1, kids.

Muckerman:
They need to start producing more oil and less natural gas up there in Pennsylvania. So, you look at this and, companies are voicing their opinion in South Carolina, saying that you need to raise more tax from gas because your roads are in such disrepair, and the delays that these congested roads are causing are hampering our business. And they're going to roll it out over six years, if it's finally approved. But I think that states need to start coming around to this. It's kind of a user-pay tax, because if you're driving, you're buying gas, you're using the roads. Even people that aren't driving, like myself, we still need our goods delivered, so we need roads for that. But I'm going to leave listeners with a question to ponder, because we have to hop off here in one minute: What happens when nobody is buying gas? Who's going to pay for these roads when electric vehicles are dominating?

O'Reilly:
Ooh, that's a fun one. All right, that is it for us, folks. Be sure to tune in tomorrow for the Technology show with Dylan Lewis. If you're a loyal listener and have questions or comments, we would love to hear from you. Just email us at industryfocus@fool.com. As always, people on this program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you hear on this program. For Taylor Muckerman, I am Sean O'Reilly, thanks for listening and Fool on!

Sean O'Reilly has no position in any stocks mentioned. Taylor Muckerman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple, Berkshire Hathaway (B shares), Kinder Morgan, and Walt Disney. The Motley Fool owns shares of ExxonMobil. The Motley Fool recommends Chevron. The Motley Fool has a disclosure policy.