Exxon Mobil and Chevron are hitting their financial targets and returning a growing amount of cash to shareholders, but Wall Street is barely shrugging.
Both companies beat earning expectations on Friday, paid out more than they did last year in dividends, and each said they are on track to buy back $17.5 billion worth of shares this year. But the stocks were hardly moving in early trading.
It’s a sign of the ceiling the stocks now face with oil and gas prices falling from last year’s levels. Oil has lately traded below $80 per barrel, versus prices above $100 last year at this time.
Chevron (ticker: CVX) reported earnings per share of $3.55 compared with a consensus call of $3.40. The shares fell 0.5% in premarket trading on Friday.
Exxon Mobil (XOM), the biggest U.S. oil company, reported earnings of $2.83 a share, compared with a consensus of $2.60. Its shares were up 0.7%.
There are signs of cost inflation that may be causing concern among investors.
Chevron’s capital expenditures rose 55% above last year’s levels, though its production fell by 2.6%. CFO Pierre Breber said in an interview with Barron’s that the drop in production had to do with some discontinued operations, including a concession in Thailand it no longer operates. Its capital expenditures rose largely because it is expanding in the United States, with the expectation that its production in the Permian Basin will rise considerably in the second half of the year. Breber said that a small portion of the increase had to do with inflation.
“There’s a lag between spending capital and seeing production,” he said, noting that “our Permian production is back-end loaded. You’ll see that particularly in the second half of the year, and you’ll see that in other parts of the portfolio.”
Exxon’s production is on the rise, growing by 150,000 barrels per day in the latest quarter, or 4.2%, year over year. Its capital expenses rose 36%.
Chevron has been more aggressive than Exxon in its shareholder return policies, however. The company’s goal of buying back $17.5 billion worth of shares per year would reduce its share count more than Exxon’s because Chevron has a smaller market cap. And its dividend yield is 3.6% versus Exxon’s at 3.1%.
Nonetheless both companies are now dealing with a different market than they faced last year: one with fewer clear opportunities for growth. They’ll also have trouble topping their 2022 performances. Exxon was up 80% and Chevron 53%.
A year ago, the war in Ukraine drove Exxon’s and Chevron’s earnings to new heights. But oil prices have been headed lower even as the war drags on, as demand slackens around the world amid recession fears.
The forces that drove the stocks higher last year have dissipated, and investors are waiting for the next catalyst.
At a basic level, both Exxon and Chevron are in strong shape. They are much more efficient than they were before the pandemic, and are consistently increasing their dividends and buying back shares. But they are still having trouble attracting new investors because earnings are expected to flatten out over the next few quarters.
Although first-quarter earnings exceeded last year’s levels, this could be the last quarter for at least a year where the companies post year-over-year gains. That’s largely because of the decline in oil and gas prices, a factor the companies don’t control.
One of the biggest questions from analysts in the coming quarter will be about mergers and acquisitions. Both companies are flush with cash, and analysts have been speculating about whether they’re going to make deals to consolidate the industry and boost their inventories.
In the interview, Breber said that any deal would have to clear a “very high bar” because Chevron has other ways to grow.
“We have multiple growth assets—not just in the Permian, but the Gulf of Mexico growing 50% by 2026; Kazakhstan, where we’ve been investing for a number of years in a very large project, which will begin to start up towards the end of the year; and other shale and tight [formations], in particular, the DJ Basin in Colorado and in Argentina.”
That said, he expects the industry to eventually consolidate.
“We’ve talked about now that we think this industry will consolidate over time, as it has for the 34 years that I’ve been in the sector,” he said. “For a low-growth industry there are too many companies. And it’s hard to find another low-growth industry that would have this many companies.”
Analysts are anticipating some deals in the near future.
Several producers “could be acquired in the coming quarters given the desire for several companies like Exxon to boost inventory,”
Truist
analyst Neal Dingmann wrote earlier this month. “2023 has already started as an active year for upstream M&A and we believe things could remain as busy throughout the year.”
Given its strong balance sheet, Exxon is in a good spot to make acquisitions, wrote Citi analyst Alastair Syme. He thinks the company could even buy a European oil major.
“We continue to argue that trans-Atlantic M&A could bring huge financial accretion,” he wrote after the earnings announcement. “So too there lie potential value opportunities through scaling (i.e. acquisitions) within the highly fragmented Permian Basin where Exxo still only sits as the #4 player (measured by resources).”
Exxon has been talking to shale driller
Pioneer Natural Resources
(PXD), according to a report in The Wall Street Journal, although neither company has commented publicly about a possible deal. Exxon characterized it as “market speculation or rumors.” Chevron made several acquisitions early in the pandemic, but has been quiet lately—focusing instead on ramping up its stock buybacks and boosting its dividend.
For the past three years, investors have mostly been negative on acquisitions because they feared buyers would pay too much. That could change, however, if they think that the major oil companies can purchase attractive properties at reasonable prices.
Not everyone expects deals, however. Pioneer Natural Resources CEO Scott Sheffield said in an interview with Barron’s this week that he doesn’t expect M&A in the near future, in part because acquiring companies seem unwilling to pay significant premiums.
Write to Avi Salzman at [email protected]
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