Released December 19, 2019 | SUGAR LAND
en
Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Global integrated oil majors, like their independent exploration & production (E&P) brethren, reported generally weaker financial results for the recently completed third quarter. A December 10 announcement from Chevron (NYSE:CVX) (San Ramon, California) that the company would take a $10 billion to $11 billion non-cash, after-tax writedown on several gas projects was only the latest in a series of retrenchments from Big Oil. Perennially low prices for natural gas, coupled with a weak pricing environment for crude oil, have forced large and small firms alike to sell assets and recognize asset impairments at the same time that they are returning billions to shareholders.
Oil and gas prices are unlikely to improve much next year either, according to the U.S. Energy Information Administration (EIA). Both commodities remain stuck in over-supplied global markets, where production gains have outstripped demand increases, holding prices down.
Click on the images at right to see charts of Brent spot crude oil prices and natural gas prices at Henry Hub.
But unlike independent producers, whose business is limited to extracting hydrocarbons, large integrated firms like Chevron, BP (NYSE:BP) (London, England), Royal Dutch Shell (NYSE:RDS.A) (The Hague, The Netherlands) and Exxon Mobil Corporation (NYSE:XOM) (ExxonMobil) (Irving, Texas) have a downstream business -- refining & marketing, and in some cases chemicals -- that can help offset declines in their E&P business.
Click on the images at right to see BP's refinery margins through the third quarter of this year.
And, unlike independent E&P firms that have cut their capital spending in response to shareholder demands, integrated oil majors have held annual capital expenditures (capex) steady in recent years, in some cases even increasing it.
Click on the image at right to see annual capital budgets for four large oil companies since 2013.
In Chevron's December 10 announcement of its asset writedown, the company's chairman and chief executive, Michael Wirth, said: "We are positioning Chevron to win in any environment by ratably investing in the highest return, lowest risk projects in our portfolio. (2020) will be the third consecutive year with organic capital spending held flat at $20 billion, continuing our capital discipline through the cycle. Our emphasis on short cycle investments is expected to deliver improved returns on capital and stronger free cash flow over the long-term."
Wirth continued: "We believe the best use of our capital is investing in our most advantaged assets. With capital discipline and a conservative outlook comes the responsibility to make the tough choices necessary to deliver higher cash returns to our shareholders over the long term."
Separately, in its third-quarter earnings announcement, Chevron Executive Vice President for Upstream Jay Johnson said the company was "reaffirming our (annual) capital guidance of $19 (billion) to $22 billion for 2021 through 2023." Chevron is one of the few integrated majors to release a multi-year projection for capital spending.
ExxonMobil's planned capital outlays this year of about $30 billion are up more than 10% from 2018 spending, and up by about 30% from spending in 2017.
Shell plans to reduce its 2019 capex by about $800 million or roughly 3%, compared to 2018 levels. Its projected capital spending this year is the same -- about $24 billion -- as it was in 2017.
Going farther back to 2013 and 2014, when oil prices were roughly double what they are today, Big Oil spent as exuberantly as smaller independent E&P companies. Every company, it seemed, embraced "drill baby drill" as an operating principle.
Today, capital spending by large integrated firms is one-third to half what it was in those earlier years.
One reason is that, as the industry becomes more knowledgeable about different hydraulic fracturing drilling and completion methods, they are producing more oil and gas with less capital outlays and fewer drilling rigs compared to earlier years. Operating efficiencies in the field have been paired with capital efficiencies at headquarters. Oil production from shale formations has doubled while the drilling rig count has fallen by more than 50% over the last 10 years.
But Big Oil, like independent E&P firms, has fallen out of favor with investors. Despite returning tens of billions of dollars to shareholders in recent years, selling non-core assets and drilling only the most promising properties, the shares of three large integrated majors -- BP, Shell and Chevron -- have increased only marginally since 2013. By contrast, ExxonMobil's shares have fallen about 20% since 2013.
It's unlikely oil companies' stock prices will rise until investors' become convinced that the sector has truly embraced "capital discipline" and discarded "drill baby drill" as an operating principle.
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.
Oil and gas prices are unlikely to improve much next year either, according to the U.S. Energy Information Administration (EIA). Both commodities remain stuck in over-supplied global markets, where production gains have outstripped demand increases, holding prices down.
Click on the images at right to see charts of Brent spot crude oil prices and natural gas prices at Henry Hub.But unlike independent producers, whose business is limited to extracting hydrocarbons, large integrated firms like Chevron, BP (NYSE:BP) (London, England), Royal Dutch Shell (NYSE:RDS.A) (The Hague, The Netherlands) and Exxon Mobil Corporation (NYSE:XOM) (ExxonMobil) (Irving, Texas) have a downstream business -- refining & marketing, and in some cases chemicals -- that can help offset declines in their E&P business.
Click on the images at right to see BP's refinery margins through the third quarter of this year.And, unlike independent E&P firms that have cut their capital spending in response to shareholder demands, integrated oil majors have held annual capital expenditures (capex) steady in recent years, in some cases even increasing it.
Click on the image at right to see annual capital budgets for four large oil companies since 2013. In Chevron's December 10 announcement of its asset writedown, the company's chairman and chief executive, Michael Wirth, said: "We are positioning Chevron to win in any environment by ratably investing in the highest return, lowest risk projects in our portfolio. (2020) will be the third consecutive year with organic capital spending held flat at $20 billion, continuing our capital discipline through the cycle. Our emphasis on short cycle investments is expected to deliver improved returns on capital and stronger free cash flow over the long-term."
Wirth continued: "We believe the best use of our capital is investing in our most advantaged assets. With capital discipline and a conservative outlook comes the responsibility to make the tough choices necessary to deliver higher cash returns to our shareholders over the long term."
Separately, in its third-quarter earnings announcement, Chevron Executive Vice President for Upstream Jay Johnson said the company was "reaffirming our (annual) capital guidance of $19 (billion) to $22 billion for 2021 through 2023." Chevron is one of the few integrated majors to release a multi-year projection for capital spending.
ExxonMobil's planned capital outlays this year of about $30 billion are up more than 10% from 2018 spending, and up by about 30% from spending in 2017.
Shell plans to reduce its 2019 capex by about $800 million or roughly 3%, compared to 2018 levels. Its projected capital spending this year is the same -- about $24 billion -- as it was in 2017.
Going farther back to 2013 and 2014, when oil prices were roughly double what they are today, Big Oil spent as exuberantly as smaller independent E&P companies. Every company, it seemed, embraced "drill baby drill" as an operating principle.
Today, capital spending by large integrated firms is one-third to half what it was in those earlier years.
One reason is that, as the industry becomes more knowledgeable about different hydraulic fracturing drilling and completion methods, they are producing more oil and gas with less capital outlays and fewer drilling rigs compared to earlier years. Operating efficiencies in the field have been paired with capital efficiencies at headquarters. Oil production from shale formations has doubled while the drilling rig count has fallen by more than 50% over the last 10 years.
But Big Oil, like independent E&P firms, has fallen out of favor with investors. Despite returning tens of billions of dollars to shareholders in recent years, selling non-core assets and drilling only the most promising properties, the shares of three large integrated majors -- BP, Shell and Chevron -- have increased only marginally since 2013. By contrast, ExxonMobil's shares have fallen about 20% since 2013.
It's unlikely oil companies' stock prices will rise until investors' become convinced that the sector has truly embraced "capital discipline" and discarded "drill baby drill" as an operating principle.
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.
