Monday, May 1, 2023

"Big Oil" Earnings ($XOM $CVX)

Looking at some earnings reports from oil producers. We still haven't heard from Marathon Oil, Canadian Natural Resources, or Suncor. (Although Suncor did announce that they bought out the woke French supermajor oil company from its joint ventures.)

Let's start with the biggest U.S. energy company, Exxon, which is now the 11th largest public company in the U.S. by market capitalization. (It is still about 10% smaller than Tesla's market capitalization!) Shares of XOM recently hit an all time high.

The current market cap of Exxon is $480 billion and their enterprise value is $495 billion. (Exxon's net debt is lower than it has been in a long time.) For the first quarter, they reported earnings of $11.4 billion, for an annualized P/E of just over 10x.

Cash flow from operations was $16.3 billion and their measure of free cash flow was $11.4 billion for the quarter. They returned $8.1 billion to shareholders during the quarter, which included $4.3 billion of share repurchases. (So shareholder returns were half of CFO and 71% of FCF.) The shareholder yield is 6.8% and the FCF/EV is 9% (both annualized).

Earnings breakdown: the Upstream segment $6.5 billion, from 3.8 million boe/d of production, a 4% year-over-year increase. (Capex was up 30%.) The Energy Products segment earned $4.2 billion. Combined, the Chemical Products and Specialty Products segments earned $1.15 billion. They get about half of their production from the Permian and the rest is very geographically diversified, all over the world.

Exxon had 7.2 billion barrels of proved crude oil reserves at the end of 2022 and 17.7 billion total BOEs of reserves. They also have 4.6 million bbl/day of refining capacity: 1.8 million bbl/day in the U.S. and 1.3 million bbl/d in Europe. That's an EV/bbl (crude only) of almost $70, which ignores the natural gas as well as refining and other operations (all very valuable), but shows you that you're not buying crude oil in the ground dirt cheap the way you do with Suncor. 

The topic of replacing reserves was discussed on the conference call for Q1:

We're always looking for an opportunity for an acquisition and one that grows value and it's got to be value-accretive. It's got to be one where what ExxonMobil brings to the table actually increases what either company would do independent of one another. And so, that's kind of, I'd say, the underlying approach.

While we're in a depletion business and, you know, we've got to work real hard to continue to bring volume on, we're not actually in the market to find volume. We're in the market to find value, and we're willing to kind of let volumes do what they will do in the search for making sure that anything that we bring into the portfolio is accretive and is a unique value contribution for the shareholders.

It is great to hear an oil producer say that they are willing to let production volumes decline. That is the capital expenditure discipline that we need from the industry.

You could look at Exxon as: big, blue chip, high name recognition, not deep value priced, integrated and geographically diversified.

Chevron (previously) is the 19th largest public company in the U.S. by market cap and the second largest energy company, with a market capitalization of $320 billion and an enterprise value of $325 billion. For the first quarter, they reported earnings of $6.6 billion, for an annualized P/E of just over 12x.

Cash flow from operations was $9 billion (excluding working capital changes) and their measure of free cash flow was $4.2 billion for the quarter. They returned $6.6 billion to shareholders during the quarter, which included $3.75 billion of share repurchases. (So shareholder returns were 73% of CFO and more than 100% of FCF.) The shareholder yield is 8.3% and the FCF/EV is 5% (both annualized). 

Chevron's capex in the first three months of 2023 was up 55 percent from the year ago quarter, "primarily due to higher investment in the United States." Despite that capex increase, liquids production was flat, and total BOE production (including natural gas) was down 1%. And there was really no discussion of this on the conference call!

They had 5 billion barrels of proved crude oil reserves at the end of 2022 and 11 billion total BOEs of reserves. They also have 1.8 million bbl/day of refining capacity including 1.1 million bbl/day in the U.S. That's an EV/bbl (crude only) of almost $65, which ignores the natural gas and other operations.

Big takeaways - Exxon and Chevron are both nearly debt free, and it sounds like they are both going to make acquisitions instead of investing in increasing production. 

But notice the big increases in capex (+30% and +55% y/y) and low-to-no production growth (+4% and -1%) at both companies. This is why we were interested in the one type of oil producer that has both very long reserve life and front-loaded costs: the Canadian oil sands majors. (It is also why we are interested in royalties on petroleum production.)

4 comments:

CP said...

ConocoPhillips total production was up 2.6% y/y and crude oil production was up 2.4% y/y.

Capex was actually down 8.4% y/y.

https://conocophillips.gcs-web.com/node/23921/html#a53392156ex99_2.htm

CP said...

Chevron Corp said on Monday it is increasing its U.S. oil and gas footprint by acquiring shale producer PDC Energy Inc in a stock-and-debt transaction worth $7.6 billion. [...]

Analysts in recent months have been questioning Chevron's ability to counter worries that the company's core U.S. shale properties are in decline following poor performance in the Permian basin of West Texas and New Mexico last year.

https://www.reuters.com/markets/deals/chevron-buy-pdc-energy-76-billion-2023-05-22/

CP said...

Good thread on the transaction:

https://twitter.com/WAR527/status/1660647482211160070

CP said...

After decades of structural underinvestment in traditional energy sources, the sector now must contend with optimizing CAPEX in an inflationary environment with increasing energy transition mandates. Globally, oil-based fuel consumption now stands 3% above pre-Covid levels.3 Europe’s pivot away from Russian natural gas supply is also supportive of U.S. LNG development.

In this context, we are seeing 15-20% capital spending increases but only 0-5% production increases. The outliers are the supermajor integrated names which are raising their CAPEX budgets to around 30% growth as they pick-up spending on clean energy projects.

https://www.morganstanley.com/im/en-us/individual-investor/insights/articles/capex-reshapes-credit-profile-sectors-in-flux.html