Kevin Crowley and Laura Hurst
Sat, October 30, 2021,
I
(Bloomberg) -- The world’s biggest energy companies are producing the most cash in years, but don’t expect them to spend it on bringing on fresh supplies of oil and natural gas to combat shortages in Europe and China this winter.
Exxon Mobil Corp., Royal Dutch Shell Plc and Chevron Corp. confirmed this week that, for the most part, they’ll spend their windfall profits on share buybacks and dividends. Capital expenditures will rise next year, but the increases come off 2021’s exceptionally low base and within frameworks established before the recent surge in fossil-fuel prices.
It’s a step-change from previous energy rallies, such the early 2010s when emerging U.S. shale plays and fears over fossil fuel shortages prompted a massive upswing in capital spending. That boom ended painfully for the industry, with overproduction and a lack of cost control. This time around, Big Oil appears content to take the cash and hand it over to shareholders, who are both weary of poor returns over the last decade and concerned about the companies’ significant climate risk.
“It’s not so long ago they got creamed by prices collapses so it’s not surprising they’re a bit gun shy on capex,” said Stewart Glickman, a New York-based analyst at CFRA Research. “It’s almost like they’re stuck between two extreme populations — the ESG crowd and cash-flow hungry shareholders.”
Producers can satisfy both groups by simply not ramping up spending on fossil fuels. But that’s bad portent for consumers crying out for more supply. Europe and Asia are currently competing for natural gas, sending prices to record levels, while the U.S. and India have asked OPEC+ to produce more oil. China has called on state-owned companies to secure energy supplies at any cost.
Chevron is perhaps the best example of a company turning away from the punch bowl. The California-based oil giant generated the most free cash flow in its 142-year history during the third quarter but intends to keep capital spending 20% below pre-Covid levels next year while increasing share buybacks. Its 2022 capital budget will come in at the low-end of its $15 billion to $17 billion range, according to Chief Financial Officer Pierre Breber, some 60% below 2014 levels.
Low-Carbon Pivot
“Over time the vast majority of the excess cash will return to shareholders in the form of higher dividends and the buyback,” he said Friday on a conference call with analysts.
Even Exxon, until last year the poster child for doubling down on fossil fuels, is now more reticent with its cash. The Texas-based energy giant announced a surprise stock buyback Friday and locked in long-term annual spending in the low $20 billion range, a cut of more than 30% from before the pandemic.
Furthermore, almost 15% of Exxon’s budget will go toward low-carbon investments, a significant departure from its previous strategy and just months after activist investor Engine No. 1 persuaded investors to replace a quarter of its board. The clean energy spending provides “optionality and builds resiliency into our plans,” CEO Darren Woods said.
Shell -- which faces pressure from an activist investor as well after Dan Loeb’s Third Point LLC revealed this week it took a stake in the company -- is even more reluctant about spending on its traditional oil business. Less than half of its capital spending will go toward oil, with the bulk directed at gas, renewables and power.
“We will not double down on fossil fuels,” Shell CEO Ben Van Beurden said this week.
Exxon Targets $10 Billion Buyback as Profits Soar on Oil Rally
Kevin Crowley
Fri, October 29, 2021
(Bloomberg) -- Exxon Mobil Corp. posted its biggest profit in seven years and pledged to spend as much as $10 billion on share buybacks amid a worldwide rally in commodity prices.
Surging natural gas prices and a rebound in refining margins added to already strong oil and petrochemical prices. Exxon earned $1.58 a share during the third quarter, it said in a statement, compared with the $1.56 average estimate among analysts in a Bloomberg survey. Net income, excluding some one-time gains and losses, reached $6.8 billion, the most since 2014.
Exxon raised dividends earlier this week in a demonstration of its re-emerging financial strength after borrowing heavily to sustain payouts and drilling during the pandemic-drive oil-market collapse.
While high commodity prices combined with steep budget cuts to supercharge cash flow in the quarter, bigger questions still loom over Exxon’s fossil fuel-focused strategy, especially after losing an activist-shareholder battle with Engine No. 1 earlier this year.
Exxon is expected to use the bulk of its extra cash to cover dividends and pay down debt, which peaked on a net basis at almost $70 billion at the end of 2020. All four of the company’s major rivals Chevron Corp., TotalEnergies SE, Royal Dutch Shell Plc and BP Plc are using this year’s commodity rally to also buy back shares, through the latter two were forced to cut their dividends last year, unlike Exxon.
Kevin Crowley
Fri, October 29, 2021
(Bloomberg) -- Exxon Mobil Corp. posted its biggest profit in seven years and pledged to spend as much as $10 billion on share buybacks amid a worldwide rally in commodity prices.
Surging natural gas prices and a rebound in refining margins added to already strong oil and petrochemical prices. Exxon earned $1.58 a share during the third quarter, it said in a statement, compared with the $1.56 average estimate among analysts in a Bloomberg survey. Net income, excluding some one-time gains and losses, reached $6.8 billion, the most since 2014.
Exxon raised dividends earlier this week in a demonstration of its re-emerging financial strength after borrowing heavily to sustain payouts and drilling during the pandemic-drive oil-market collapse.
While high commodity prices combined with steep budget cuts to supercharge cash flow in the quarter, bigger questions still loom over Exxon’s fossil fuel-focused strategy, especially after losing an activist-shareholder battle with Engine No. 1 earlier this year.
Exxon is expected to use the bulk of its extra cash to cover dividends and pay down debt, which peaked on a net basis at almost $70 billion at the end of 2020. All four of the company’s major rivals Chevron Corp., TotalEnergies SE, Royal Dutch Shell Plc and BP Plc are using this year’s commodity rally to also buy back shares, through the latter two were forced to cut their dividends last year, unlike Exxon.
Earlier Friday, Chevron reported record third-quarter cash flow and surpassed all Wall Street profit forecasts on the strength of soaring gas and oil-refining returns. Chief Financial Officer Pierre Breber said in an interview that the supermajor is weighing more share buybacks as a result of the windfall.
Exxon Chief Executive Officer Darren Woods is likely to update to the oil giant’s strategy next month after discussions with new directors. A greater focus on the company’s carbon footprint and new emissions targets are expected but more contentious would be how it plans to invest in the future.
The perils of the energy transition for Big Oil executives were underscored this week when activist hedge fund manager Daniel Loeb pushed for a breakup of Shell. The Anglo-Dutch major, which has rejected Loeb’s demands, posted record cash flow on Thursday but disappointed investors when earnings fell well short of expectations.
Woods introduced an aggressive plan to grow fossil fuel production in 2018 that he was forced to abandon during the pandemic. With cash rolling in once again and commodity markets squeezed for supplies, it would seem opportune to restart the investment plan, but shareholders made it clear earlier this year that they want Exxon to refocus long-term plans and accelerate the energy transition.
Exxon, Chevron Eye Billions in Buybacks as Cash Flows Surge
Kevin Crowley
Fri, October 29, 2021
Exxon, Chevron Eye Billions in Buybacks as Cash Flows Surge
(Bloomberg) -- Exxon Mobil Corp. and Chevron Corp. are plowing windfall profits into share buybacks as soaring energy prices boost cash flows.
Exxon will revive repurchases for the first time since 2016, spending as much as $10 billion from next year in a move that surprised analysts. Chevron is considering an expansion of its buyback program after surging natural gas prices and oil-refining returns drove free cash flow to an all-time high in the last quarter. Shares of both companies climbed.
The oil giants are using windfall profits to reward shareholders rather than ramp up spending on new drilling as was done during previous booms. That’s a blow to energy consumers around the world as supply shortages and price spikes spark inflation concerns. Both companies kept 2022 budgets within previously guided ranges.
With commuting and air travel picking up, there’s “strong demand across our products with more recovery expected” during the current quarter, Chevron Chief Financial Officer Pierre Breber said in an interview. “We’re a better company than we were pre-Covid. Costs are down, production is up, and we’re much more capital efficient.”
Exxon earned $1.58 a share during the third quarter, compared with the $1.56 average estimate among analysts in a Bloomberg survey. Net income, excluding some one-time gains and losses, reached $6.8 billion, the most since 2014.
Exxon rose 0.6% to $64.71 at 11:39 a.m. in New York, bringing the year-to-date advance to 57%. Chevron climbed 1.1%.
Double-Digit Returns
Another surprise was Exxon’s announcement of a fourfold increase in low-carbon investments just months after activist investor Engine No. 1 replaced a quarter of the oil giant’s board.
“We expect double-digit returns across all our businesses and we don’t look at this business really any differently,” Chief Financial Officer Kathryn Mikells said during a conference call.
Crucially, Exxon’s long-term capital budget is unchanged, indicating less cash available for fossil- fuel projects.
Chevron’s quarterly profit excluding one-time items was $2.96 per share, which surpassed every analyst estimate compiled by Bloomberg. Earnings were so strong that the company’s net-debt-to-capital ratio has fallen below its target of 20% to 25%, a key threshold that could spur an increase in stock repurchases beyond the current $2 billion to $3 billion a year range, Breber said.
Click here to follow our Top Live blog for Chevron and Exxon earnings
“We’re fast approaching a net-debt ratio where we could increase our buyback guidance range even further,” he said.
Chevron reduced its full-year capital-budget target to $12 billion to $13 billion from $14 billion, citing pandemic-related project deferrals and reduced costs in the Permian Basin.
The oil explorer has thus far avoided the attentions of activist investors like those that have targeted Exxon and, more recently, Shell. Chevron Chief Executive Officer Mike Wirth is betting on a strategy of enriching shareholders and increasing production, while at the same time addressing climate concerns by lowering a controversial measure of carbon emissions.
Free cash flow of $6.7 billion in the quarter allowed Chevron to fund a dividend that’s among the top 10 in the S&P 500 Index, and reduce debt. But the company bought back just $625 million of shares in the period, the mid-point of its targeted range.
Chevron shares rose as much as 2.3% in pre-market trading in New York while Exxon gained as much as 1.6%.
What Bloomberg Intelligence Says
“Focus shifts to growth, with Exxon betting on Guyana, the Permian and downstream to carry the load over the next two years. ESG pressures may shift future spending. In light of its massive $15 billion annual dividend, we believe asset sales and a lower debt load would be needed if Exxon turns toward greener investments.”
--Fernando Valle, senior energy analyst, and Brett Gibbs, associate analyst
A big reason why oil supermajors are generating record cash flow is because of deep budget cuts made during the pandemic-driven oil-market collapse of last year. Chevron’s year-to-date spending was 22% lower than the year-earlier period.
But with record natural gas prices in Europe and Asia, and robust crude prices everywhere, there are growing incentives to increase investments in fossil fuels.
Kevin Crowley
Fri, October 29, 2021
Exxon, Chevron Eye Billions in Buybacks as Cash Flows Surge
(Bloomberg) -- Exxon Mobil Corp. and Chevron Corp. are plowing windfall profits into share buybacks as soaring energy prices boost cash flows.
Exxon will revive repurchases for the first time since 2016, spending as much as $10 billion from next year in a move that surprised analysts. Chevron is considering an expansion of its buyback program after surging natural gas prices and oil-refining returns drove free cash flow to an all-time high in the last quarter. Shares of both companies climbed.
The oil giants are using windfall profits to reward shareholders rather than ramp up spending on new drilling as was done during previous booms. That’s a blow to energy consumers around the world as supply shortages and price spikes spark inflation concerns. Both companies kept 2022 budgets within previously guided ranges.
With commuting and air travel picking up, there’s “strong demand across our products with more recovery expected” during the current quarter, Chevron Chief Financial Officer Pierre Breber said in an interview. “We’re a better company than we were pre-Covid. Costs are down, production is up, and we’re much more capital efficient.”
Exxon earned $1.58 a share during the third quarter, compared with the $1.56 average estimate among analysts in a Bloomberg survey. Net income, excluding some one-time gains and losses, reached $6.8 billion, the most since 2014.
Exxon rose 0.6% to $64.71 at 11:39 a.m. in New York, bringing the year-to-date advance to 57%. Chevron climbed 1.1%.
Double-Digit Returns
Another surprise was Exxon’s announcement of a fourfold increase in low-carbon investments just months after activist investor Engine No. 1 replaced a quarter of the oil giant’s board.
“We expect double-digit returns across all our businesses and we don’t look at this business really any differently,” Chief Financial Officer Kathryn Mikells said during a conference call.
Crucially, Exxon’s long-term capital budget is unchanged, indicating less cash available for fossil- fuel projects.
Chevron’s quarterly profit excluding one-time items was $2.96 per share, which surpassed every analyst estimate compiled by Bloomberg. Earnings were so strong that the company’s net-debt-to-capital ratio has fallen below its target of 20% to 25%, a key threshold that could spur an increase in stock repurchases beyond the current $2 billion to $3 billion a year range, Breber said.
Click here to follow our Top Live blog for Chevron and Exxon earnings
“We’re fast approaching a net-debt ratio where we could increase our buyback guidance range even further,” he said.
Chevron reduced its full-year capital-budget target to $12 billion to $13 billion from $14 billion, citing pandemic-related project deferrals and reduced costs in the Permian Basin.
The oil explorer has thus far avoided the attentions of activist investors like those that have targeted Exxon and, more recently, Shell. Chevron Chief Executive Officer Mike Wirth is betting on a strategy of enriching shareholders and increasing production, while at the same time addressing climate concerns by lowering a controversial measure of carbon emissions.
Free cash flow of $6.7 billion in the quarter allowed Chevron to fund a dividend that’s among the top 10 in the S&P 500 Index, and reduce debt. But the company bought back just $625 million of shares in the period, the mid-point of its targeted range.
Chevron shares rose as much as 2.3% in pre-market trading in New York while Exxon gained as much as 1.6%.
What Bloomberg Intelligence Says
“Focus shifts to growth, with Exxon betting on Guyana, the Permian and downstream to carry the load over the next two years. ESG pressures may shift future spending. In light of its massive $15 billion annual dividend, we believe asset sales and a lower debt load would be needed if Exxon turns toward greener investments.”
--Fernando Valle, senior energy analyst, and Brett Gibbs, associate analyst
A big reason why oil supermajors are generating record cash flow is because of deep budget cuts made during the pandemic-driven oil-market collapse of last year. Chevron’s year-to-date spending was 22% lower than the year-earlier period.
But with record natural gas prices in Europe and Asia, and robust crude prices everywhere, there are growing incentives to increase investments in fossil fuels.
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