Big Oil has delivered a set of remarkable earnings. Without fanfare, ExxonMobil Corp., Chevron Corp. and Shell Plc all did in the fourth quarter what they’d promised: Start new oil and gas projects; cut costs; return lots of money to shareholders. It’s a model for the notoriously boom-and-bust industry.
Together, the three companies at the top of the global energy industry returned more than $80 billion to shareholders last year, up from $78 billion in 2022 despite lower oil and gas prices, lower refining margins and fewer trading opportunities.
The cash gusher cemented the companies as one of the stock market’s biggest payers, trailing only the big tech companies. On the basis of dividends and share buybacks, Exxon and Chevron were last year among the top-10 payers in the S&P 500 Index. The only two other industrial companies among the 10 largest were drug giant Johnson & Johnson and military behemoth RTX Corp.
Now, Big Oil needs to turn that feat into a recurring event – without the help of another energy crisis. Financial acumen, rather than geopolitical upheaval, will be key. So, it would be sticking to the plan that has tentatively attracted anew some investors previously disenchanted with Big Oil: focus on return on capital employed. On average, that measure was in double digits for the trio for the second consecutive year in 2023.
But let’s face it, the industry would need to do that quarter after quarter after quarter for the foreseeable future. Investor skepticism shows in their market valuation. Take Exxon. On a price-to-book ratio, it’s trading at just two times, well below the three-to-four times of its golden era in the early 2000s, according to data compiled by Bloomberg. Chevron and Shell are trading at even lower levels.
And Big Oil still doesn’t have many allies in Wall Street, and certainly even fewer in the greener City of London. In the climate-crisis era, Fossil Fuel Inc. needs to shower shareholders with money just to keep investors onside.
From the sound of it, industry chief executives get it. Last week, they mentioned the word “plan” 31 times on their post-earnings conference calls – the fourth highest number of mentions in 25 years, according to Bloomberg data. Exxon CEO Darren Woods was paradigmatic. In quick succession, he told shareholders Exxon would go “forward into the plan”; it’s already “on that plan”; and, in some areas, “ahead of our plans.”
What’s the plan exactly? To my mind, it’s a three-fold endeavor. First, run the assets well. The simplest dollar earned in the oil industry is that coming from running an oilfield, refinery or chemical plant as close as possible to 100% of the time. Downtime is bad business. That doesn’t mean compromising on safety. The opposite is true: preventive maintenance can save money avoiding, more costly failures. Running the assets well has a broader meaning: deliver new projects on schedule.
Second, keep a tight leash on capital expenditures. Over the last two years, Big Oil has done a good job reducing capex compared to the heyday of the early 2000s. Yet, more recently, capex has been running slightly above guidance. Exxon is a big culprit. The company argues it spent more because it saw great opportunities. Perhaps, but investors have heard that before – and it didn’t end well. Stephen Richardson, an analyst at Evercore Inc., had suggested a good approach to Exxon’s capital spending, which can be applied across all of Big Oil. It echoes the Cold War’s motto of nuclear disarmament: Investors should trust the company’s spending, but also verify that the promised returns are delivered.
The new executive team at BP Plc — CEO Murray Auchincloss and Chief Financial Officer Kate Thomson — delivered the right message on Tuesday. The company reduced 2024 and 2025 capex to $16 billion, down from a previous guidance of as much as $18 billion, in turn opening the door for more cash to be returned to shareholders. "We are going to be hugely disciplined on capital allocation," Thomson told investors on a conference call.
Third, operational spending needs to continue to decline, if possible, ahead of schedule. Opex, as it's known, grabs far less attention than capex. Yet, it’s more important because any savings tend to be long-lasting. The problem is that saving money from day-to-day spending isn’t easy, and involves mundane measures like telling staffers to print in black-and-white, rather than color. Ungratifying as it is, it would keep free cash for paying shareholders, particularly if oil and gas prices drop further in 2024 and 2025. Opex control would be even more important for Exxon and Chevron as both digest big acquisitions (Pioneer Natural Resources Co. and Hess Corp., respectively) where synergies depend a lot on reducing overlapping day-to-day spending.
The stuff of the next 12 or 24 months isn’t flashy. It isn’t about $150-a-barrel oil, sky-high gas prices or another convulsion in the Middle East or Russia. It’s about becoming a boring cash machine. Quarter after quarter after quarter.
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