(Bloomberg) — Exxon Mobil Corp. and Chevron Corp. recently explained to investors why they want to spend a combined $114 billion on two major deals. However, their earnings reports, released on Friday, revealed the reasons why they need to make these investments.
Exxon’s oil production is currently near its lowest level since its merger with Mobil Corp. over 20 years ago. Chevron disclosed obstacles affecting key growth projects in Kazakhstan and the Permian Basin in West Texas and New Mexico.
In summary, the era of easy oil production growth is over.
The market reacted quickly and harshly. Chevron’s stock fell nearly 7% and Exxon closed 1.9% lower, despite oil prices rising due to increased tensions in the Middle East. Shareholders’ response indicates concerns about the fossil fuel industry, especially when compared to sectors like technology, according to Dan Pickering, a veteran shale oil financier and founder of Houston-based Pickering Energy Partners.
“Welcome to the oil patch,” said Pickering. “Investors don’t believe this business can be sustainable, they don’t believe in the discipline of these companies. They’d rather focus on Amazon or any other tech company.”
In contrast to their European counterparts, Exxon and Chevron have made significant investments in fossil fuels during the ESG (environmental, social, and governance) boom of the past four years. Nevertheless, the companies have struggled to find new sources of crude oil. Offshore exploration is costly and unpredictable, while US shale fields are experiencing declining production growth as the best acreage has already been fracked.
Both Exxon and Chevron made their recent acquisitions from positions of strength, benefiting from higher energy prices last year that translated into record profits. These successes bolstered their stock prices, providing them with strong purchasing power to acquire smaller competitors.
Exxon’s recent $62 billion purchase of Pioneer Natural Resources Co. will establish its dominance as a producer in the Permian. On the other hand, Chevron is acquiring Hess Corp. for $52 billion, thereby gaining involvement in one of the world’s largest and fastest-growing oil projects in Guyana.
Both deals have been executed as all-stock transactions with modest takeover premiums and are the largest in the oil industry in over eight years. Consequently, these acquisitions have threatened to overshadow the earnings reports of Exxon and Chevron. However, their existing operations have not escaped scrutiny.
Chevron disclosed another delay and cost overrun at its $45 billion Tengiz project in Kazakhstan. The cash flow generated by Tengiz is expected to be approximately $1 billion less than previously anticipated when it eventually comes online in 2025.
Exxon, while having a stronger growth profile due to its foothold in Guyana and the divestment of higher-cost assets, has seen its production average drop to just 3.69 million barrels of oil equivalent per day in the third quarter, nearing a two-decade low. The growth generated from Guyana and the Permian has failed to offset the impacts of asset sales, OPEC production curtailments, and the natural decline in productivity that affects all oilfields.
Additionally, Exxon reported a 70% collapse in earnings from chemicals, an area previously identified as a key growth opportunity for major oil companies.
“The industry is still recovering from the impact of the pandemic, and the lower levels of capital that have been going in across the industry to offset the depletion that’s been happening,” said Exxon CEO Darren Woods in an interview on Bloomberg TV.
Chevron listed various technical issues in the Permian, including limits on wastewater production, high levels of carbon dioxide in natural gas, and difficulties faced by production partners in fracking. While smaller competitors have also confronted similar challenges as the Permian has expanded into the world’s largest shale patch, it is uncommon for such details to be disclosed by an oil giant.
“This is an example of the basin maturing,” said Pickering. “What is surprising is that Chevron mentioned it, as they are a large company and usually avoid such specific details.”
Addressing these problems is likely to increase costs. According to JPMorgan Chase & Co., the global oil and gas industry is expected to increase spending by approximately 10% this year to $545 billion, following a 34% surge last year. Earlier this week, Halliburton Co. CEO Jeff Miller reminded investors of one of the industry’s major challenges, particularly in shale.
“The reality is you have to do more work in order to stay flat.”
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