A Boom That’s Built To Last

    Q1 Earning Results From Oil And Gas Majors Provide A Glimpse Into the State Of The Industry

    US$100 per barrel West Texas Intermediate crude oil and US$5 per MMBtu Henry Hub natural gas prices are one thing. Seeing how these commodity prices impact some of the world’s largest energy and industrial companies is quite another. ExxonMobil and Chevron are raking in cash at a pace we haven’t seen in eight years. However, what they are doing with the cash is nothing like the spending patterns we saw from 2008 to 2014.

    Meanwhile, Caterpillar posted record earnings in 2021 and then followed that performance by growing revenue by 14% in Q1 2022 versus Q1 2021 while profits increased by 3%. Yet demand may be weaking in some of its key segments while inflation increases costs and compresses profit margins.

    Here are the key takeaways from a few major industry players and what it could mean for the state of the industry in 2022 and 2023.

    Big Oil, Big Money

    ExxonMobil and Chevron are raking in the revenue and generating positive net income. ExxonMobil’s net income would have been significantly higher if it weren’t for project write downs related to the Russia-Ukraine conflict.

    Q1 2022 Financial Metrics ExxonMobil Chevron
    Revenue US$87.73 billion US$52.31 billion
    Capital Expenditures (Capex) US$4.9 billion US$2.8 billion
    Net Income US$5.48 billion US$6.26 billion
    Free Cash Flow US$10.8 billion US$6.1 billion
    Debt Paid US$2.1 billion US$2 billion
    Dividends Paid US$3.76 billion US$2.7 billion
    Shares Repurchased US$2.07 billion US$1.3 billion

    Data Source: ExxonMobil And Chevron

    Despite the strong financials, ExxonMobil and Chevron kept their short- and medium-term guidance relatively unchanged. ExxonMobil is guiding for US$21 billion to US$24 billion in 2022 capex and around US$20 billion to US$25 billion per year through 2027. This guidance is a lot lower than ExxonMobil’s pre-pandemic spending estimates, which called for annual capex as high as US$30 billion. Chevron is guiding for US$15.3 billion in 2022 capex and between US$15 billion and US$17 billion per year through 2027. In 2019, it had initially guided for 2020 capex of US$20 billion.

    Lower Production

    One of the most surprising takeaways from ExxonMobil and Chevron’s results is that both companies posted lower net liquids production and lower oil equivalent production in Q1 2022 compared to Q1 2021.

    Metric ExxonMobil Q1 2022 ExxonMobil Q1 2021 Chevron Q1 2022 Chevron Q1 2021
    Net Liquids Production 2.266 million bpd1 2.258 million bpd 1.736 million bpd 1.826 million bpd
    Net Natural Gas Production2 8.452 MMscf/d 9.173 MMscf/d 7.947 MMscf/d 7.770 MMscf/d
    Oil Equivalent Production3 3.675 million boe/d 3.787 million boe/d 3.06 million boe/d 3.121 million boe/d
    1Barrels Per Day
    2Million Standard Cubic Feet Of Natural Gas Per Day
    3Natural Gas To Oil Equivalent Is 6 Million Scf Of Natural Gas Per 1000 Barrels Of Oil Equivalent (boe).


    Despite oil and natural gas prices hovering around eight-year highs, ExxonMobil and Chevron both saw total oil equivalent production decrease by 3% and 2%, respectively, in Q1 2022 compared to Q1 2021.

    The Permian Basin proved to be one of the rare plays where investments are ramping up considerably. ExxonMobil averaged 360,000 boe/d of Permian production in 2020, 460,000 boe/d in 2021, 560,000 boe/d in Q1 2022, and is guiding for 575,000 boe/d for all of 2022. ExxonMobil finished 2021 with routine Permian Basin flaring down 75% compared to 2019 levels and expects to end routine flaring by the end of this year.

    Chevron achieved record unconventional Permian Basin production in Q1 2022. For Q1 2022, Permian Basin production averaged 692,000 boe/d. Chevron expects 2022 Permian production to average between 700,000 and 750,000 boe/d. Add it all up, and Chevron expects the Permian Basin to account for roughly 25% of its total 2022 oil and natural gas production.

    Buybacks And Dividends

    ExxonMobil previously announced a US$10 billion buyback program for 2022 but now expects to spend a total of US$30 billion in share buybacks between 2022 and 2023. It spent US$2.07 billion on buybacks in Q1 2022. It expects to gradually increase its rate of buybacks as it builds cash on the balance sheet.

    For context, consider that ExxonMobil hasn’t had a year where it spent more than US$1 billion on buybacks since 2015. In fact, its planned buybacks for 2022 and 2023 would amount to nearly nine times the amount of money it spent buying back stock from 2016 to 2021. However, even today’s buybacks are a drop in the bucket compared to its highest annual buyback in history, which was in 2008 when it bought back around US$35 billion in stock in a single year.

    “There will be periods, I think, where you see some movement in both cash and how the balance sheet is structured and based on where we’re at and where the revenues are,” said ExxonMobil CEO Darren Woods on the company’s Q1 2022 earnings call.

    Chevron also increased its buyback program. “We just increased our buyback guidance at our investor day back in March from US$5 billion to US$10 billion,” said Chevron CFO, Pierre Breber on its Q1 2022 earnings call. “We were at US$5 billion rate here in Q1. We’re doubling it now to the top of the range of US$10 billion, and we’ll just see where the environment goes from here. We are setting the buyback at a rate that we can maintain across the commodity cycle. We could have a higher buyback rate this quarter or next quarter, but the goal is not to maximize the buyback rate in any individual quarter. It’s to set it at a level that we can maintain when the cycle turns. And therefore, we can rebalance our net debt ratio closer to our mid-cycle guidance.”

    Chevron has grown its market capitalization at a faster rate than ExxonMobil over the last 15 years. Back in 2008, Chevron was a much smaller company. The US$10 billion buyback plan would be the largest in Chevron’s history. Chevron indicated that nothing is set in stone when it comes to buybacks. Its priority remains its financial health and low cost of production. Chevron reminded investors that it performed the best of the oil majors during the 2020 crash — which is true in that Chevron, despite being second only to ExxonMobil in terms of size, lost the least amount of money of the majors during 2020. “We showed at our investor day low case of US$50 Brent and so that we can maintain the buyback for multiple years, even though US$50 is notionally right around the breakeven for covering both our dividend and our capital,” said Breber. “And then, of course, we showed the high case of US$75 where buybacks were, in fact, higher than the current US$10 billion guidance. And we could buy back at that point in time, it was more than 25% of the company, it’s a little bit less based on the current stock price.”

    Aside from reminding folks of its financial discipline and low cost of production, Chevron was keen on making it known its dividend is 20% higher now than it was pre-pandemic while many other majors have lower dividends. Chevron has increased organic investment by 30% in 2022 compared to 2021. Including acquisitions, investments are up 50% this year.

    ExxonMobil has a net debt to capital ratio of 17% while Chevron’s is currently 11%. Both companies are targeting long-term net debt-to-capital ratios between 20% and 25%, meaning they could slow down paying down debt, and instead, use the balance sheet as a means to invest in the business or buy back stock. Put another way, both companies are making so much cash while paying down debt that they now find their balance sheets in almost too good of shape.

    Low-Carbon Investments

    After years of low renewable and alternative energy investments relative to their European peers, ExxonMobil and Chevron are now showing greater interest in low-carbon investments. It’s one thing to delay low-carbon investment when oil and gas prices are low. But if both companies were to hold off investments in low-carbon alternatives during an upcycle like this one, then they would probably face a slew of backlash from various stakeholders who could argue that their net-zero goals are nothing more than greenwashing.

    Instead, we are seeing a much greater interest in ESG investment from ExxonMobil and Chevron. As mentioned, ExxonMobil expects routine flaring in the Permian Basin to cease by year-end 2022. In September 2021, ExxonMobil began certifying shale gas emissions. In December 2021, it pledged net-zero Permian Basin operations by 2030. In January, it became the final oil major to pledge net-zero by 2050. And in March, it announced a hydrogen production plant and carbon capture and storage (CCS) projects at its integrated refining and petrochemical site at Baytown, Texas.

    During its Q1 2022 earnings call, ExxonMobil announced that it was restructuring its business with a renewed focus on ESG and low carbon. “In addition to investing in high-value opportunities in our existing businesses, we are also advancing opportunities in our low-carbon solutions business,” said Woods. “During the quarter, we announced plans to build a large-scale hydrogen plant in Baytown, Texas. We anticipate the facility will have the capacity to produce up to 1 billion cubic feet of hydrogen per day. Combined with carbon capture, transport, and storage of approximately 10 million metric tons of carbon dioxide [CO2] per year, this facility will be a foundational investment in the development of a Houston CCS hub, which will have the potential to eliminate 100 million metric tons of CO2 per year. We also reached a final investment decision to expand another important carbon capture and storage project at our helium plant in Wyoming. In addition, we received the top certification of our management of methane emissions at our Poker Lake development in the Permian. We’re the first company to achieve this certification for natural gas production associated with oil. We combined our downstream and chemical operations into a single product solutions business. This new, integrated business will be focused on developing high-value products, improving portfolio value, and leading in sustainability. As a result of these changes, our company is now organized along three primary businesses: upstream, product solutions, and low-carbon solutions.”

    Similarly, Chevron has upped the ante with its low-carbon investments. In March, Chevron announced it was buying Renewable Energy Group for US$3.15 billion in cash. The transaction is expected to accelerate progress toward Chevron’s goal to grow renewable fuels production capacity to 100,000 barrels per day by 2030 and brings additional feedstock supplies and pretreatment facilities. Chevron is making an effort to reduce the carbon intensity of its existing oil and gas operations, as well as invest more into liquefied natural gas (LNG), which has the potential to lower coal consumption in energy-dependent countries and decease their dependence on Russian gas. “LNG is on everybody’s mind these days. It’s important to meeting Europe’s needs. It’s important to delivering a lower-carbon energy system globally, and we see this strong market here in the near term,” said Chevron CEO Michael Wirth.

    In addition to Renewable Energy Group, Chevron has made sizeable acquisitions the last few years, including its US$13 billion 2020 acquisition of Noble Energy. When asked about future merger and acquisition activity, Chevron seemed to indicate it was in no rush to announce any major deals anytime soon. “We’re trying to leverage our strengths to deliver lower-carbon energy to a growing world,” said Wirth. “And I think that drives the way we think about our portfolio today and tomorrow.

    Impact On The Industrial Sector

    More than half of Caterpillar’s sales come from outside the United States. Its diverse business spans the construction, oil and gas, power generation, marine and rail transportation, agriculture, mining, and other industries in the energy and industrial sectors. Given its size and scope, Caterpillar is naturally seen as an industrial bellwether for the broader economy.

    The company’s Q1 results, as mentioned, saw revenue and earnings growth. Compared to Q1 2021, Q2 2022 revenue in construction industries rose 12%, energy and transportation revenue rose 12%, and resource industries revenue rose 30%, while construction industries profit rose just 1%, energy and transportation profit declined 20%, and resource industries profit rose 16%. Most concerning was that profit margins in all three of Caterpillar’s business segments and for its financial products division were lower in Q2 2022 than in Q1 2022. Oil and gas generated US$948 million in Q1 2022 revenue, which was 4% higher than Q1 2021 while power generation generated 5% higher revenue in Q1 2022 than in Q1 2021. Put another way, demand and pricing power are not strong enough to offset higher costs due to inflation.

    Caterpillar is confident that full-year 2022 demand will offset inflation pressures, especially if interest rates rise and lead to lower inflation. However, the investment appetite of companies like ExxonMobil and Chevron are being reflected in Caterpillar’s numbers. Caterpillar’s customers are not chomping at the bit to reinvest profits right away. Bruised and battered from the pandemic-induced crash, they are enjoying positive free cash flows and don’t seem in a hurry to ramp up investment just yet. This isn’t necessarily bad for companies like Caterpillar because they do have pricing power and a track record for enduring economic cycles. It just means that this oil and gas boom isn’t behaving like past booms.

    The Industry Has Fundamentally Changed

    ExxonMobil and Chevron did not succumb to the usual spending boost to capitalize on higher oil and gas prices. Rather, both companies produced less in Q1 2022 than in Q1 2021 and plan to allocate less capex through 2027 than they originally forecasted to spend pre-pandemic. A baseline amount of oil and gas investment continues to persist. And there are some exciting new discoveries and LNG projects in the works that we didn’t get a chance to discuss in this article for brevity’s sake. However, in general, the oil majors are showing an unwillingness to double down on fossil fuel investment, and are instead, investing in renewable energy like solar, wind, hydropower, and green hydrogen, and alternative energy like renewable natural gas (RNG) and sustainable aviation fuel. What’s more, ExxonMobil and Chevron are playing it safe by simply executing multi-year high buybacks and massive dividend raises.

    The response is not surprising. To understand a company’s decisions, it’s important to first understand where they are coming from. Since the crash of 2014 and 2015, ExxonMobil and Chevron have spent the better part of the last eight years facing an onslaught of scrutiny and complaints from investors, lenders, politicians, environmental groups, and regular citizens. They have struggled to recruit new talent and restore their brand images. There is only so much of that degree of criticism that a company can take before it breaks. ExxonMobil and Chevron are tired of the ridicule. They have chosen the path of least resistance — which is appeasing their stakeholders instead of stubbornly advancing down an oil slicked road that leads toward even more backlash and maybe even their eventual demise.

    Industry veterans know the game that public companies must play. In today’s socially and environmentally responsible world, it is clear that investors do not view a dollar in net income equally across businesses. From a market cap standpoint, a dollar of net income generated from a wind farm is given a valuation maybe three or even five times higher than a dollar produced from a coal plant. ExxonMobil and Chevron have learned this lesson the hard way. Although they could be making a lot more money right now, they are choosing instead to make less money while checking off all the boxes Wall Street has so desperately been begging them to check for years now. Compared to ExxonMobil and Chevron, BP, Shell, TotalEnergies, and Equinor have been much more proactive with their renewable investments and with their long-term net-zero goals as well as their short- and medium-term goals. If ExxonMobil and Chevron don’t plan to substantially increase production when prices are this high, it stands to reason they probably never will.

    As we saw with Caterpillar, the silver lining of lower industry spending is an ability to raise prices. The demand is still rising, just not as fast as many hoped for. But if the supply rises at a lower rate than demand, that gives the energy and industrial sectors the ability to raise prices and grow profit margins. If all goes according to plan, we could see a prolonged period of high oil and gas prices, lower oil and gas investment, and higher low-carbon investment. If this forecast comes true, it will benefit all stakeholders. Pure-play oil and gas companies would see their margins rise and remain high. Original equipment manufacturers would likely see sales growth as customers focus on reducing total cost of ownership and take a longer-term approach to the investment cycle. Investments in hydrogen, RNG, and renewables will continue to gain traction, with some of today’s largest oil and gas companies likely becoming tomorrow’s leaders in these fields.

    ExxonMobil and Chevron have thrown in the towel and are now more focused on doing what everyone wants them to do instead of simply making as much money as possible. If executed correctly, this course of action won’t just save these companies, but could mean that their best days are actually ahead of them.