ExxonMobil and Chevron, the US’s two biggest energy producers, have laid out their strategy to cope with the worst crude oil price crash in history: cut back now, keep investors happy, and be ready for a market recovery.
They will not touch the dividend, they said on Friday, despite the announcement a day before from Royal Dutch Shell, the supermajors’ biggest European rival, that it would slash its payment to shareholders as part of a longer-term transition away from fossil fuels.
“The dividend is secure,” said Mike Wirth, Chevron’s chief executive, in an interview after announcing first-quarter earnings that bucked an industry-wide trend of losses. Chevron’s earnings rose year-on-year by about a third, to $3.6bn.
Exxon’s quarter was not as bright. It posted a loss of $610m compared with profits of $2.4bn a year earlier. The drop included a non-cash charge of almost $3bn to account for the impact of weaker oil prices on the value of its inventory and assets. Cash flow from operations and diluted earnings per share both came in above analysts’ forecasts.
But Darren Woods, Exxon’s chief executive, was equally adamant on the topic of his company’s cherished payout to shareholders.
“I don’t look to what Shell is doing to decide our dividend policy,” he said on a conference call on Friday. The dividend was “an important part of the value proposition” for Exxon’s shareholders.
Both US oil heavyweights will, though, continue to cut capital spending. Exxon is sticking with the 30 per cent reduction this year, to $23bn, that it announced last month. Chevron went deeper, lopping another $2bn from its planned capital spending in 2020, which will now be as low as $14bn.
Exxon’s share price closed about 7 per cent lower on Friday. Chevron’s ended down about 2.5 per cent, faring slightly better than the weaker S&P 500 index.
US shale, where activity can be dialled up or down quickly, will bear the brunt of the two companies’ cuts. Exxon’s output from the Permian basin was about 350,000 b/d in the first quarter but will end the year lower as capital spending cuts bite. In March, Exxon made the Permian the centrepiece of the group’s growth strategy.
Chevron had targeted production of 600,000 b/d from the area by the end of the year, but has since scaled this back to 475,000 b/d — lower than first-quarter production. Activity is quickly winding down, with just five rigs working compared with 17 earlier this year.
Mr Wirth said the cuts could deepen if the market worsened. “There’s always room for one more notch tighter on the belt.”
Idling rigs cuts US production quickly because output from shale wells declines so steeply after an initial spurt. Thousands of new wells are needed each year just to keep overall supply flat, let alone growing.
Much more radical — especially for supermajors accustomed to riding out price cycles — is that the two companies are joining smaller producers in choosing to shut producing wells.
Chevron will shut off as much as 400,000 b/d of supply in June, equivalent to almost 15 per cent of the group’s total output. About half of that will come from its international business, including in Opec countries that from May 1 began enacting deep supply cuts.
Exxon said it would cut a similar amount in the second quarter, about a third from operations in Opec countries and the rest curtailed from the Canadian oil sands and Texas’s Permian projects.
Yet however drastic this seems, both companies seemed sanguine, viewing the crisis as a short-term disruption — not a long-term threat to the oil business.
Mr Woods pointed to population growth and global economic expansion as fundamentals that would underpin rising long-term need for his company’s fuels — a mantra of the Texan energy giant that defies its European rivals’ talk of peak oil demand.
Far from couching in fear, Exxon has continued to raise debt through the downturn and increased a revolving credit facility to $15bn. Mr Woods said a strong cash position helped the company remain “flexible to market developments, including an eventual recovery”.
The company’s decision not to reduce spending further this year also pointed to its confidence in a recovery, suggesting Exxon was keen to keep spending counter-cyclically.
It may need a price recovery. Biraj Borkhataria, an analyst at RBC Capital Markets, praised Exxon for a strong first quarter, but noted its $75 a barrel break-even oil price was much higher than the average of $50 among its peers.
Brent, the international oil benchmark, closed at $26.44 a barrel on Friday.
Chevron said it had “stress-tested” its business at a long-term price of $30 a barrel. It found that even if it took on more debt to fund capex and paid $10bn a year in dividends, the company would end 2021 with a net-debt ratio of less than 25 per cent, well beneath Chevron’s peers, said Pierre Breber, its chief financial officer.
By then, the oil heavyweights hope, a recovery may have taken hold.
Exxon’s chief even said the curtailments to production now could cause a shortage of oil supply by the end of 2020, although burgeoning stocks would keep prices from rallying too high.
Mr Wirth, at Chevron, also suggested the worst of the crisis was upon the oil sector. “It feels like you’re bumping along the bottom in terms of demand,” he said. “It feels like this quarter and perhaps the next quarter are going to be the toughest quarters.”
If the nadir is imminent, so too is the part in the oil-price cycle when the supermajors begin feeding on smaller rivals. The distressed shale patch looks ripe for a wave of mergers.
Mr Woods said the “opportunity exists” and consolidation would “resonate in the industry”. Mr Wirth said he was “alert to the opportunities” but Chevron would be “patient and prudent”.
Last year, Chevron briefly fought a takeover battle with Occidental Petroleum to buy Anadarko. Occidental won, paying $56bn. Chevron walked away with a $1bn break-fee from Anadarko.
Since then, Occidental’s own market capitalisation — including Anadarko — has slumped to barely a third its value at the time of the deal. Chevron’s powder has remained dry. Could it be tempted back?
“We’ve moved on from that,” said Mr Wirth. “Deposited the cheque and moved on.”