Vantage Point Advisors Energy Blog November 2021

Are the Oil Majors Moving to the Minors?

Last Friday, the two largest US oil and gas companies, ExxonMobil and Chevron, announced their 3rd Quarter earnings to investors. Not surprisingly, given current oil prices greater than $80 / BBL and natural gas prices above $5.60 per MMBtu, both companies exceeded their earnings targets. Revenue targets, however, were another story.

Exxon Mobil (XOM)

Exxon said Friday that its third-quarter profit was the highest in years as improving demand, higher commodity prices and streamlined operations boosted results. The company earned $1.58 per share during the period on an adjusted basis, which was ahead of the $1.56 analysts surveyed by Refinitiv were expecting.[1]

Revenue, however, totaled only $73.79 billion, short of the $76.34 billion the Street was expecting. If prices are currently at their 6-year highs, why would Exxon’s top-line sales fall short? The answer lies in Exxon’s use of operating cash going forward.

Exxon’s cash flow from operating activities was $12.1 billion. Rather than reinvesting this cash to support new growth and production, Exxon is using this cash to increase its dividends to shareholders and to reduce its debt. Exxon also announced that starting in 2022, it plans to begin a share repurchase program of up to $10 billion over the following 12 to 24 months.

These moves are in line with certain shareholders’ demands of “capital discipline.” 

As shown above, out of the $12.1 billion of cash flow produced from operations in the third quarter, only about 25% of this was used for new investments in future production. In comparison, debt reduction and shareholder distributions made up about 30% each of the cash from operations. [2] Given the steep initial declines seen in horizontal well production levels, it is reasonable to expect top-line results to continue to fall as Exxon returns capital to investors resulting in a smaller company.

Chevron (CVX)

Chevron also produced strong results from last quarter, posting its highest free cash flow on record.  The oil giant beat top and bottom-line estimates for the period, earning $2.96 per share on an adjusted basis. Wall Street analysts were expecting the company to earn $2.21 per share on sales of $40.52 billion, according to estimates from Refinitiv. [3]

Chevron paid $2.6 billion in dividends during the period, repurchased $625 million worth of stock, and reduced debt by $5.6 billion.  Chevron said it continues to exercise capital discipline, and 2021 spending is down 22% year-over-year.

As shown above, out of the $9.0 billion of cash flow produced from operations in the third quarter, only about 21% of this was used for new investments in future production. In comparison, debt reduction comprised 62% and shareholder dividends and repurchases made up 36% of operating cash flow, collectively. [4]

Like its largest competitor, Exxon Mobil, Chevron is taking a path that results in a smaller future company.

WTI Strip Prices Increase

Spot prices and near-term futures prices for the WTI contract increased by approximately $6.00 per barrel in the near term and increased approximately $1.00 per barrel over the longer term.

However, 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 November 2, 2021, 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 $64.50 and $97.00 per barrel in mid-February 2022. Likewise, there is roughly a 95% chance that prices will be between $46.00 and $127.50. By mid-April 2022, the one standard deviation (1σ) price range is $59.50 to $99.50 per barrel, and the two-standard deviation (2σ) range is $39.50 to $140.00 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 $95 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 that by this February.

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

[1], “Exxon posts highest quarterly profit in years, but revenue disappoints” October 29, 2021

[2] ExxonMobil Third Quarter 2021 Results, 10.29.21

[3], “Chevron reports highest free cash flow on record as rebound in oil boost results; shares gain”, October 29, 2021

[4] Chevron Third Quarter 2021 Earnings Call, 10.29.21