Released June 15, 2021 | SUGAR LAND
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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--They took the pledge and, so far, they're keeping it.
Oil companies, stung in recent years by various reversals, including low crude oil prices and widespread demand destruction stemming from last year's COVID-19 pandemic, promised investors that when crude oil prices rose again, they would spend the incremental cash flow on debt repayment and increased dividends. They promised they would not repeat the mistakes of the past by using surplus cash to pursue costly prestige projects, buy other companies or get enmeshed in bidding wars for new acreage.
So far, they're keeping their word. Crude oil prices have been rising for roughly 14 months, following a price war that triggered an historic plunge into negative territory in April 2020. For more on the spring 2020 turbulence that rocked oil markets and oil companies, see May 5, 2020, article - Big Oil Hits the Skids, Battered by Excess Supply, Soft Demand and Low Prices; March 30, 2020, article - Oil Market: Where is the Bottom?; March 16, 2020, article - Oil & Gas Producers Slash Capital Outlays, Citing Uncertainties over COVID-19, Crude Oil Price War; and March 11, 2020, article - Crude Oil Price War Roils Markets, Leads Some Firms to Cut Capex.
West Texas Intermediate (WTI), the U.S. crude oil benchmark, is hovering around $70 per barrel, its highest level since late 2018. Brent, the international benchmark, is trading a few dollars higher. Rising prices have added billions to the cash flows of the supermajors. But a review of first-quarter earnings reports for Big Oil shows the companies are fulfilling their pledge of capital discipline. Lenders are being repaid; shareholders are seeing higher dividends and special payouts; and capital spending, most of which goes to exploration & production, is down as much as 50% from a decade ago, in the early days of the shale revolution.
"It's refreshing to see the supermajors keep their pledge of capital discipline," said Jesus Davis, Industrial Info's research specialist for North American Oil & Gas Production, Pipelines and Terminals. "Many of the biggest integrated oil companies were barely making a profit on their upstream activities, even when oil was priced even higher than it is today. Happily, over the last few years, there has been an increased focus on lowering operating expenses, as well as capital expenditures (capex); selling peripheral assets; increasing shareholder returns; and focusing the corporate strategy and executing against it."
Large investors like pension funds, private equity funds and venture capital have for years been pressuring oil & gas companies to abandon grandiose dreams and return more cash to shareholders like themselves. Today's capital discipline on the part of oil & gas companies is partially a response to those calls.
But there's another factor in Big Oil's embrace of capital discipline: the world, including large investors, appears to be turning against hydrocarbons in an effort to abate global warming. Companies have a reduced appetite for spending billions of dollars over a prolonged period to bring new oil & gas projects online at a time when governments, investors, consumers and non-governmental organizations are pushing efforts to cut emissions of carbon dioxide (CO2). For more on that, see May 24, 2021, article - IIR Energy Analysts Question Feasibility of IEA Roadmap to Net-Zero Emissions.
Click on the image at right for a graph showing project kickoff activity this year by top non-government-owned oil & gas majors.
Here's a round-up of what the supermajors are reporting to investors.
Exxon Mobil
Higher crude oil prices boosted cash flow from operations by approximately $5.3 billion during the first quarter, the Irving, Texas-based supermajor told investors April 30. The company lowered its debt by about $4.3 billion during the quarter, while cutting capex by $4 billion, to roughly $3.1 billion.
This year, ExxonMobil Corporation (NYSE:XOM) plans to limit capital outlays to between $16 billion and $19 billion, about half of what it spent a decade ago. Over the 2022-2025 period, the company expects to increase capex to between $20 billion and $25 billion annually. It scaled back as much as $50 billion of planned upstream investments over the 2020-2025 period.
During the first quarter, ExxonMobil told investors it lowered lease operating expenses (LOE) by 40% compared with the first quarter of 2019. Drilling and completion (D&C) costs fell by a similar percentage over the same timeframe. It also detailed its plans for new low-carbon and decarbonization businesses tied to energy.
ExxonMobil's shares are up about 50% year to date.
Royal Dutch Shell
Royal Dutch Shell plc (NYSE:RDS.A) (The Hague, Netherlands) told investors it would cut capex to between $19 billion to $22 billion per year for the near-term future while it sells peripheral assets and lowers its indebtedness. Once debt is lowered to $65 billion (it was $71.3 billion as of March 30, 2021), the company said annual capital spending will rise to between $23 billion and $27 billion.
Shell's current and future annual capex is about half of what it was in 2013. For years, the company has been reorienting its portfolio to have a higher weighting of natural gas and liquefied natural gas (LNG). It plans to continue investing in its LNG business, while its oil production is expected to decline 1% to 2% per year to 2030.
Capex for the first quarter was slightly less than $4 billion, down 28% from fourth-quarter 2020 capital spending. The company reported earnings of $5.7 billion for the first quarter, a dramatic reversal from a loss of $24 million in the comparable year-earlier quarter. This year's first quarter results were plumped by about $1.8 billion in asset sales and accounting treatment of derivatives.
Shell is evaluating the potential sale of all or part of its Permian Basin assets, which could be worth more than $10 billion, as the company is facing growing pressure to cut carbon emissions, Reuters reported last week.
The company's common stock is up about 10% year-to-date.
BP
BP plc (NYSE:BP) (London, England) is pursuing a high-profile corporate transformation from an international oil to an international energy company by sharply boosting its investments in renewable energy and selling off legacy assets, like its production in Alaska's North Slope.
The company projected its capex in 2021 will be about $13 billion, down from $14.1 billion in 2020 and a peak of $20.2 billion in 2015.
In a news release titled "Performing while Transforming," BP said it earned $3.3 billion for the first quarter, a dramatic reversal from the comparable year-earlier quarter when losses totaled about $628 million.
Commenting on first-quarter results, BP Chief Executive Officer Bernard Looney said, "This quarter demonstrates what we mean by performing while transforming. With the acceleration of divestment proceeds, together with strong business performance and the recovery in the price environment, we generated strong cash flow and delivered on our net debt (reduction) target around a year early. ... And at the same time, we've delivered disciplined strategic progress right across BP--including building a high-quality offshore wind business, making great strides in our electrification agenda, and setting ourselves up for further growth in the Gulf of Mexico.
So far in 2021, the company's stock is up about one-third.
Chevron
The supermajor is following its peers in raising shareholder payouts while it cuts debt. It is not abandoning core projects like the Permian Basin, where it plans to double its investment over the 2020-2025 period to about $4 billion.
The company told investors that a new bonus program had a 30% weighting for capital discipline, just below financial results and ahead of operating and safety performance. Chevron (NYSE:CVX) (San Ramon, California) has a capital budget of about $14 billion this year--down sharply from 2016, when it invested about $16 billion in capital projects.
In contrast to the other supermajors, Chevron reported lower first-quarter earnings when compared with the year-earlier quarter. For the first quarter of 2021, the company earned about $1.4 billion, down sharply from $3.6 billion for the first quarter of 2020. Capital spending declined 43% from the comparable year-earlier quarter.
Mike Wirth, the company's chairman and chief executive officer, said higher oil prices strengthened earnings, but overall quarterly results were down from a year ago due to weaker refining margins and volumes, some of which were tied to the pandemic, as well as the impacts of Winter Storm Uri in February.
"We maintained capital discipline ... (and) we realized cost efficiencies from last year's restructuring and the integration of Noble Energy," Wirth said. "As a result, free cash flow, excluding working capital, was $3.4 billion in the first quarter 2021, and the board approved a 4% dividend increase."
Investors seemed to like it: Chevron's stock is up about 28% year-to-date, a percentage gain greater than Shell's, but less than BP's and ExxonMobil's.
"Investors seems to be warming to oil & gas stocks, after many years where they were the worst-performing industry group in the Standard & Poor's Index," said Industrial Info's Davis. "Year-to-date, the S&P 500 Index is up about 13%, which is far less than ExxonMobil, BP and Chevron, but slightly higher than Shell."
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.
Oil companies, stung in recent years by various reversals, including low crude oil prices and widespread demand destruction stemming from last year's COVID-19 pandemic, promised investors that when crude oil prices rose again, they would spend the incremental cash flow on debt repayment and increased dividends. They promised they would not repeat the mistakes of the past by using surplus cash to pursue costly prestige projects, buy other companies or get enmeshed in bidding wars for new acreage.
So far, they're keeping their word. Crude oil prices have been rising for roughly 14 months, following a price war that triggered an historic plunge into negative territory in April 2020. For more on the spring 2020 turbulence that rocked oil markets and oil companies, see May 5, 2020, article - Big Oil Hits the Skids, Battered by Excess Supply, Soft Demand and Low Prices; March 30, 2020, article - Oil Market: Where is the Bottom?; March 16, 2020, article - Oil & Gas Producers Slash Capital Outlays, Citing Uncertainties over COVID-19, Crude Oil Price War; and March 11, 2020, article - Crude Oil Price War Roils Markets, Leads Some Firms to Cut Capex.
West Texas Intermediate (WTI), the U.S. crude oil benchmark, is hovering around $70 per barrel, its highest level since late 2018. Brent, the international benchmark, is trading a few dollars higher. Rising prices have added billions to the cash flows of the supermajors. But a review of first-quarter earnings reports for Big Oil shows the companies are fulfilling their pledge of capital discipline. Lenders are being repaid; shareholders are seeing higher dividends and special payouts; and capital spending, most of which goes to exploration & production, is down as much as 50% from a decade ago, in the early days of the shale revolution.
"It's refreshing to see the supermajors keep their pledge of capital discipline," said Jesus Davis, Industrial Info's research specialist for North American Oil & Gas Production, Pipelines and Terminals. "Many of the biggest integrated oil companies were barely making a profit on their upstream activities, even when oil was priced even higher than it is today. Happily, over the last few years, there has been an increased focus on lowering operating expenses, as well as capital expenditures (capex); selling peripheral assets; increasing shareholder returns; and focusing the corporate strategy and executing against it."
Large investors like pension funds, private equity funds and venture capital have for years been pressuring oil & gas companies to abandon grandiose dreams and return more cash to shareholders like themselves. Today's capital discipline on the part of oil & gas companies is partially a response to those calls.
But there's another factor in Big Oil's embrace of capital discipline: the world, including large investors, appears to be turning against hydrocarbons in an effort to abate global warming. Companies have a reduced appetite for spending billions of dollars over a prolonged period to bring new oil & gas projects online at a time when governments, investors, consumers and non-governmental organizations are pushing efforts to cut emissions of carbon dioxide (CO2). For more on that, see May 24, 2021, article - IIR Energy Analysts Question Feasibility of IEA Roadmap to Net-Zero Emissions.
Here's a round-up of what the supermajors are reporting to investors.
Exxon Mobil
Higher crude oil prices boosted cash flow from operations by approximately $5.3 billion during the first quarter, the Irving, Texas-based supermajor told investors April 30. The company lowered its debt by about $4.3 billion during the quarter, while cutting capex by $4 billion, to roughly $3.1 billion.
This year, ExxonMobil Corporation (NYSE:XOM) plans to limit capital outlays to between $16 billion and $19 billion, about half of what it spent a decade ago. Over the 2022-2025 period, the company expects to increase capex to between $20 billion and $25 billion annually. It scaled back as much as $50 billion of planned upstream investments over the 2020-2025 period.
During the first quarter, ExxonMobil told investors it lowered lease operating expenses (LOE) by 40% compared with the first quarter of 2019. Drilling and completion (D&C) costs fell by a similar percentage over the same timeframe. It also detailed its plans for new low-carbon and decarbonization businesses tied to energy.
ExxonMobil's shares are up about 50% year to date.
Royal Dutch Shell
Royal Dutch Shell plc (NYSE:RDS.A) (The Hague, Netherlands) told investors it would cut capex to between $19 billion to $22 billion per year for the near-term future while it sells peripheral assets and lowers its indebtedness. Once debt is lowered to $65 billion (it was $71.3 billion as of March 30, 2021), the company said annual capital spending will rise to between $23 billion and $27 billion.
Shell's current and future annual capex is about half of what it was in 2013. For years, the company has been reorienting its portfolio to have a higher weighting of natural gas and liquefied natural gas (LNG). It plans to continue investing in its LNG business, while its oil production is expected to decline 1% to 2% per year to 2030.
Capex for the first quarter was slightly less than $4 billion, down 28% from fourth-quarter 2020 capital spending. The company reported earnings of $5.7 billion for the first quarter, a dramatic reversal from a loss of $24 million in the comparable year-earlier quarter. This year's first quarter results were plumped by about $1.8 billion in asset sales and accounting treatment of derivatives.
Shell is evaluating the potential sale of all or part of its Permian Basin assets, which could be worth more than $10 billion, as the company is facing growing pressure to cut carbon emissions, Reuters reported last week.
The company's common stock is up about 10% year-to-date.
BP
BP plc (NYSE:BP) (London, England) is pursuing a high-profile corporate transformation from an international oil to an international energy company by sharply boosting its investments in renewable energy and selling off legacy assets, like its production in Alaska's North Slope.
The company projected its capex in 2021 will be about $13 billion, down from $14.1 billion in 2020 and a peak of $20.2 billion in 2015.
In a news release titled "Performing while Transforming," BP said it earned $3.3 billion for the first quarter, a dramatic reversal from the comparable year-earlier quarter when losses totaled about $628 million.
Commenting on first-quarter results, BP Chief Executive Officer Bernard Looney said, "This quarter demonstrates what we mean by performing while transforming. With the acceleration of divestment proceeds, together with strong business performance and the recovery in the price environment, we generated strong cash flow and delivered on our net debt (reduction) target around a year early. ... And at the same time, we've delivered disciplined strategic progress right across BP--including building a high-quality offshore wind business, making great strides in our electrification agenda, and setting ourselves up for further growth in the Gulf of Mexico.
So far in 2021, the company's stock is up about one-third.
Chevron
The supermajor is following its peers in raising shareholder payouts while it cuts debt. It is not abandoning core projects like the Permian Basin, where it plans to double its investment over the 2020-2025 period to about $4 billion.
The company told investors that a new bonus program had a 30% weighting for capital discipline, just below financial results and ahead of operating and safety performance. Chevron (NYSE:CVX) (San Ramon, California) has a capital budget of about $14 billion this year--down sharply from 2016, when it invested about $16 billion in capital projects.
In contrast to the other supermajors, Chevron reported lower first-quarter earnings when compared with the year-earlier quarter. For the first quarter of 2021, the company earned about $1.4 billion, down sharply from $3.6 billion for the first quarter of 2020. Capital spending declined 43% from the comparable year-earlier quarter.
Mike Wirth, the company's chairman and chief executive officer, said higher oil prices strengthened earnings, but overall quarterly results were down from a year ago due to weaker refining margins and volumes, some of which were tied to the pandemic, as well as the impacts of Winter Storm Uri in February.
"We maintained capital discipline ... (and) we realized cost efficiencies from last year's restructuring and the integration of Noble Energy," Wirth said. "As a result, free cash flow, excluding working capital, was $3.4 billion in the first quarter 2021, and the board approved a 4% dividend increase."
Investors seemed to like it: Chevron's stock is up about 28% year-to-date, a percentage gain greater than Shell's, but less than BP's and ExxonMobil's.
"Investors seems to be warming to oil & gas stocks, after many years where they were the worst-performing industry group in the Standard & Poor's Index," said Industrial Info's Davis. "Year-to-date, the S&P 500 Index is up about 13%, which is far less than ExxonMobil, BP and Chevron, but slightly higher than Shell."
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.
