Monday, January 31, 2022

Chevron's Low Capex Budget for 2022 Bodes Well for Oil Prices

Chevron (CVX) reported $29.2 billion of cash from operations for 2021. Out of that, they spent $5.9 billion, net, on capital expenditures and spent $13 billion paying down debt and $10 billion on dividends.

So, only 20% of operating cash flow was reinvested in producing more oil and gas (or in the downstream refining and chemicals businesses) last year.

Crude oil was in the $90 to $110 range for all of 2013. That year, they had $35 billion of cash from operations, spent $36 billion on capital expenditures (more than 100% reinvested), borrowed $8 billion, and returned $12 billion in buybacks and dividends - reducing their cash on hand by $5 billion.

Chevron is one of the 10 largest oil producers in the world. They spent $6 billion on capex last year, and have announced that they are going to spend $15 billion this year. Global oil demand will be likely be up ~10% this year over 2013, but they are going to invest only 40% as much as in 2013.

It reminds me of how first the airline industry, and now auto manufacturers, figured out that its smart not to constantly expand production capacity. When they restrain themselves, they get a double benefit because they can charge more (capture more consumer surplus) and they have more cash for shareholder returns instead of capex.

We tweeted these thoughts about Chevron's capex in a thread over the weekend. We watch industry capex because it informs our Sector Rotation Value Strategy. Also see past oil and energy related posts on CBS:


CP said...

The world is hurtling towards an oil supply crisis. Starved of cash flow during a seven-year bear market, the oil industry has been unable to sufficiently invest in new productive capacity that both satisfies growth in demand while offsetting base declines.

Investment spending peaked in 2014 and has remained low since then. The last of the major projects sanctioned in an era of US$100 WTI has been brought online and the cupboard of new projects, so to speak, is now bare. Historically, spending would have strongly rebounded along with better corporate cash flows due to the recent rise in oil prices, yet what is unique in this cycle are the gating factors of environmental, social and corporate governance (ESG) pressures coupled with shareholders’ demand for dividends and share buybacks over production growth.

CP said...

[E]vidence builds that US producers are draining their working capital of drilled but uncompleted wells (DUCs) at a furious pace. The December reading of 4,616 is the lowest since early 2014 and represents a precipitous decline of 48% from the pre-Covid highs.

CP said...

Exxon had operating cash flow of $48 billion in 2021 and spent $13 billion (net) on capex and asset purchases. Only 27% reinvestment.

They repaid $20 billion of debt and paid $15 billion of dividends. Did not buy back any stock.

Market cap $342 billion.