Earnings Q1 2024: Exxon Mobil (XOM), Chevron (CVX), and Imperial (IMO)

Chevron (release)
First quarter liquids production for CVX was 1.1 million barrels per day of liquids in the U.S., with another 800k barrels per day in the international upstream. Their U.S. upstream liquids production was down 3% from the prior quarter and up 29% year-over-year. Capex for the U.S. upstream was up 27% y/y. That gives a "production shortfall" (remember Shale Treadmill) of negative 2%.

Unfortunately, they don't break out the "liquids" production between crude and NGLs, but the price realization for liquids was $57/bbl (vs $73 for intl upstream), indicating that it must have a substantial, low-value NGL component.

International liquids production was down 1.2% from the prior quarter and down 2.2% from the prior year. International upstream capex was up 56% y/y. The international natural gas realized price is much higher than the U.S.: $7.25 per mcf instead of $1.24.

Overall, upstream earnings were $5.2 billion (up 1.5% y/y) and downstream earnings were $783 million (down 57% y/y).

Chevron's free cash flow for the quarter was $2.7 billion, which was down 36% y/y. With a market capitalization of $305 billion (at $165 per share) and net debt of $15.6 billion, Chevron's enterprise value is $320 billion, which puts the annualized FCF/EV yield at only 3.4%.

Exxon (release)
First quarter liquids production for XOM was 816k barrels per day of liquids in the U.S., with another 1.7 million barrels per day in the international upstream. Their U.S. upstream liquids production was down 4% from the prior quarter and flat year-over-year. Capex for the U.S. upstream was flat versus the prior quarter and up 8% y/y. That gives a "production shortfall" of 8%.

International liquids production, which is much more important for Exxon than it is for Chevron, was flat from the prior quarter and up 1.4% from the prior year. International upstream capex was down 6.5% y/y.

Overall, upstream earnings were $5.7 billion (down 12% y/y), downstream earnings were $1.4 billion (down 67% y/y), chemical earnings were $785 million (up 112% y/y), and specialty products earnings were $761 million (down 2% y/y).

Exxon's free cash flow for the quarter was $10 billion, which was down 12% y/y. With a market capitalization of $469 billion (at $118 per share) and net debt of $5 billion, Exxon's enterprise value is $475 billion, which puts the annualized FCF/EV yield at 8.4%, heaps better than Chevron.

Imperial (release)
First quarter liquids production for IMO (net to them) was 357k barrels per day, down 2% year over year, with upstream capex down 10% y/y for a production shortfall of negative 8%. Once again, Imperial has the best results on the production shortfall metric, and this is understated because XOM/CVX likely have a rising share of lower value NGLs in their U.S. upstream liquids production.

Imperial's upstream earnings were (USD) $407 million (up 69% y/y), downstream earnings were $460 million (down 28% y/y), and chemical earnings were $42 million (flat y/y).

Imperial's $1.1 billion of cash from operations, less $363 million of capital expenditure, gives $737 million of free cash flow for the quarter. That is a yield of 7.2% on the enterprise value of $41 billion.

Imperial share count is down 8.2% y/y, although they did not repurchase any shares during Q1.

CBS Thoughts
Imperial and Exxon seem superior to Chevron at present valuations. Note that Exxon's business will shift more towards shale if (or when) the merger with Pioneer Natural Resources (PXD) closes. Pioneer gives detail of its oil, NGL, and natural gas production volumes. In the fourth quarter of 2023 (release), oil volumes were 381k barrels per day, up 8.5% y/y. Capital expenditures in Q4 2023 were $1.18 billion versus $1.06 billion the year prior; up 11%. So, not too bad of a production shortfall, which is what we found when we were doing the Shale Treadmill research last year.

"Big Oil" Earnings - Q2 2023 ($XOM $CVX)

We are watching the Shale Treadmill at oil and gas producers this quarter, starting with two of the supermajor integrated oil companies, ExxonMobil and Chevron. (See last quarter's notes.)

Exxon reports that its worldwide production of liquids was 2.35 million barrels per day, which was down 5.7% from the first quarter and up 2% versus the second quarter of 2022. Total hydrocarbon production (including natural gas) was 3.6 million barrels of oil equivalent per day, down 5.8% from the first quarter and down 3.3% from the second quarter of 2022.

Upstream capital expenditures were $4.6 billion in the second quarter versus $4.6 billion in the first quarter (so, flat) and $3.6 billion in the second quarter of 2022 (up 27% year-over-year). So with flat capex, production declined almost six percent. 

Exxon drills wells in shale basins like the Permian, but they also have significant conventional production, so they are not on as bad of a capital expenditure treadmill as the pure-play shale producers.

Chevron reports that its worldwide production of liquids was 1.7 million barrels per day, which was up 1% from the first quarter and up 3% from the second quarter of 2022. Total hydrocarbon production (including natural gas) was 3 million barrels of oil equivalent per day, flat from the first quarter and up 2% from the second quarter of 2022.

Upstream capital expenditures were $3.2 billion in the second quarter versus $2.6 billion in the first quarter (up 23%) and $2.2 billion in the second quarter of 2022 (up 49% year-over-year). Chevron is spending huge incremental amounts on capex to keep production barely flat.

Remember that Chevron also agreed to buy PDC Energy, Inc. and that deal is supposed to be closing this quarter. PDCE was one of the worst producers in our Shale Treadmill study, with capex was up 94% year-over-year in the first quarter but delivering total production was down 3.3% with oil production down 6%.

Upcoming earnings reports for other producers:

• August 1 (Tuesday) - PXD
• August 2 (Wednesday) - PDCE, CHRD, MRO, OXY
• August 3 (Thursday) - SU, CNQ, COP
  

"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.)

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:

• Hydrocarbon Royalties and Pipelines
• Review of Twilight in the Desert by Matt Simmons
• Capital Allocation Problem in the Oil and Gas Industry
• Energy Return on Energy Invested: Peak Oil, Liquid Fuels, and the Possibility of Sustained Economic Decline
• Modelling an Unprofitable Oil Well