Vantage Point Advisors Energy Blog February 2022

Chevron CEO says the company is focused on carbon, returning capital to shareholders, and maintaining financial discipline with respect to drilling… and earnings.

Last Friday, Chevron (the second-largest US oil company) released its fourth-quarter earnings.  Not surprisingly, revenues beat expectations (given higher commodity prices), but EPS results were lower than expected given some non-cash charges.  Chevron reported adjusted earnings per share of $2.56, lower than the $3.14 per share analysts were expecting, according to estimates from FactSet. The miss on earnings came despite the company reporting revenues of $48.13 billion, which was much higher than estimates of $45.337 billion.

What came through loud and clear, however, were the following key themes stated by Chevron CEO Michael Wirth during his interview on CNBC’s Squawk Box: [1]

  • Lower carbon,
  • Returning capital to shareholders via higher dividends and share buybacks, and
  • Maintaining the financial discipline not to drill when oil prices are approaching $90 per barrel.

Not surprisingly, Chevron’s reported free cash flow was at a record high, given the combination of high sales and low capital expenditures.  In fact, Michael Wirth stated that Chevron’s capital expenditures were down 50% as compared to 2019 and he committed that Chevron would continue to “leverage our strengths to deliver lower carbon energy.”

Lower carbon energy and emissions is a key message from the Biden Administration and is one that the major oil company CEOs have taken to heart.  But at what cost?

A new analysis from McKinsey & Co.[2] estimates that the investment, in new infrastructure and systems, needed to meet international climate goals could be $9.2 trillion a year annually through 2050.  That’s at least $3.5 trillion more a year than the world is currently laying out for both low-carbon and fossil-fuel infrastructure and changes in how people use land.

McKinsey analysts estimated how much investment would be necessary, and what behavioral changes would be required, to slash the impact of greenhouse gas pollution to zero by 2050, in alignment with scientific guidance and the Paris Agreement.  Their findings suggest that in return for stable planetary conditions, coal use would be virtually eliminated globally by 2050.

Oil and gas production would drop 55% and 70%, respectively, and electricity prices would rise by a quarter until 2040 and they would remain 20% higher than today through 2050.

The McKinsey report concludes with the observation that “this is truly a global problem that will require a global solution,” said Hamid Samandari, a McKinsey senior partner and co-author.  “It will require a level of cooperation and resolve, and unity of purpose that is beyond what it has been in the past.”

With the year 2050 being only 28 years away, if FanDuel or DraftKings were to provide odds, I would not bet on coal-powered electricity being eliminated by then, especially within China.

WTI Strip Prices Increase

Spot prices and futures prices for the WTI contract increased by approximately $12.00 per barrel in the near term and approximately $6.00 per barrel over the longer term.

The oil price curve remains in “backwardation” reflecting the market’s expectation of lower future spot prices.

Oil Price Outlook

The price distribution below shows the crude oil spot price on January 31, 2022, as well as the predicted crude oil prices based on options and futures markets. Blue lines are within one standard deviation (σ) of the mean, red lines are within two standard deviations.

Based on these current prices, the markets indicate there is a 68% chance oil prices will range from $66.00 and $108.00 per barrel in mid-May 2022. Likewise, there is roughly a 95% chance that prices will be between $44.00 and $150.00. By mid-July 2022, the one standard deviation (1σ) price range is $61.00 to $112.00 per barrel, and the two standard deviation (2σ) range is $37.00 to $167.50 per barrel.

Key Takeaways

Remember that option prices and models reflect expected probabilities, not certain outcomes, but that does not make them any less useful. If someone asks you longingly if oil will be at $100 per barrel again soon, you now can respond that markets indicate there is about a 16% probability that oil prices are expected to be above $108 by this May.

For more information, contact:

Gregory E. Scheig, CPA/ABV, CFA, CMA
Vantage Point Advisors
Managing Director / Energy Practice Leader
Certified Mineral Appraiser
180 State St., Suite 225, Southlake, TX 76092

214.254.4801
gscheig@vpadvisors.com

 

[1] As seen on CNBC’s Squawk Box, January 28, 2022

[2] Oil & Gas 360, “McKinsey pegs the cost of net-zero 2050 goals at $9.2 trillion a year,” January 27, 2022, https://www.oilandgas360.com/mckinsey-pegs-the-cost-of-net-zero-2050-goals-at-9-2-trillion-a-year/