This analysis is by Bloomberg Intelligence Senior Energy Analyst Fernando Valle. It appeared first on the Bloomberg Terminal.
Large integrated oil companies are delivering robust free cash flow, even as global oil and gas prices fall, and may be in a strong position for consolidation if prices remain low. Capital discipline and cost cutting have reduced the group’s leverage to the lowest levels in over a decade. Though short-term demand weakness is putting pressure on oil prices, we see a longer-term supply gap emerging, which may encourage larger players to increase spending on exploration and acquisition after nearly a decade of underinvestment. US peers appear most likely to buy oil and gas assets, though Europeans have walked back plans to wean off oil.
Big Oil’s capital discipline and cost-cutting are showing clear results, as free cash flow remains above 2019 levels even as oil fall below $80 a barrel. The group generated upward of $199 billion in free cash in 2022 and managed to deliver $37.4 billion in 1Q despite lower prices. Cost-inflation and a need to invest may limit free-cash upside in 2H.
Big Oil cleaned up balance sheet, keep discipline
The oil majors spent most of their 2021 free cash flow cleaning up balance sheets, pushing net debt below pre-pandemic levels and closer to the 20-year average. This lifted a key overhang on the sector, as debt levels proved an albatross during the pandemic, driving BP and Shell to cut dividends and putting added pressure on Exxon Mobil, though it staved off concerns on its massive $15 billion annual payout. Capital discipline and greater operational efficiency were critical. The group spent only 45% of its 2014 investment budget in 2022. G&A as a percentage of sales fell below 3% in 2022, down 25% for the US majors and 9% for the group. BP was the only company to see a rise in G&A percentage.
With global interest rates rising, there’s potential that Big Oil will maintain its low-debt profile, similar to the early 2000s.
Upstream spending signals narrow supply reaction to demand
Subdued capital spending by international oil companies, besides Saudi Aramco, partly due to pandemic pressure on balance sheets and the climate-change-driven shift toward low-carbon energies suggests the supply response to potentially higher near-term demand could be limited. Saudi Arabia Oil Minister Abdulaziz bin Salman warned of a possible energy crisis resulting from declining investment in upstream. Oil majors trimmed spending by more than 25% in 2020, following Covid-19’s demand blow, and are expected to remain cautious as weakened finances and budget discipline are prioritized.
The increase in oil majors’ aggregate capital spending is mainly driven by Aramco, while the rest of the peer group’s spending may only return to 2019 levels around 2025, according to MODL<GO> data.
Exxon raises buybacks; Guyana, Product Solutions to grow
Exxon is positioned to distribute $32.5 billion to shareholders in 2023 (7.5% yield) at $70 Brent despite its spending guidance of $24 billion, the high end of its range. Acceleration of the Payara project in Guyana, a 13% increase in 2022-27 low-carbon spending and inflation impacts are contributing to 2023 capex higher than expectations of $20-$25 billion under its Strategic Plan. Upstream investments represent about two-thirds of its budget, with the Permian and Guyana underpinning production growth of 3% a year from 2023-27.
Exxon’s refining business differentiates it from peers, representing 36% of 2022 earnings through 3Q. Record-high refining margins, volume recovery and a product mix shift toward lubricants, performance chemicals and biofuels could push Product Solutions to account for 40% of 2027 earnings.
Chevron leans into Gulf of Mexico, renewable fuels
Chevron may distribute over $20 billion in 2023 (about 6.5% yield) at $70 Brent, while preserving balance-sheet strength. Spending guidance of $17 billion is at the high end of the $15-$17 billion long-term range. A ramp-up in the Gulf of Mexico, with investments expected to exceed $2.3 billion in 2023, is a contributing factor. Chevron expects cost inflation in the mid-single digits in 2023, with the Permian at low-double digits. Permian spending of $4 billion is consistent with its five-year plan to hit 1 million barrels a day in 2025 from 700,000 in 2022.
The company’s net debt-to-capital ratio of 4.9% allows it to sustain and increase shareholder distributions at lower oil prices. Downstream investments accelerate a push in biofuels and the CPChem joint venture.
Bloomberg
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