Exxon and Chevron: a tale of two failing strategies in new energy era
Exxon and Chevron have become lightning rods in the backlash against fossil fuels
Houston — Everyone from environmentalists to investors is beating up on fossil fuels, and US energy giants ExxonMobil and Chevron are taking increasingly diverging approaches as they try to weather the storm.
The problem is, neither strategy is working right now.
Exxon is using the downturn in oil, gas and chemical prices as an opportunity to unleash its giant balance sheet to fund a slew of mega-projects around the world. Chevron is sticking with austerity — to such an extent that CEO Mike Wirth admitted he sounds like “a broken record” repeating a mantra of financial discipline.
The companies posted their worst results in years on Friday, dragged down by weak performance across most business lines. The origin of much of their current problems can be traced back to the US’s shale revolution, which in little over a decade ended a domestic shortage of oil and gas and created a seemingly limitless source of supply, pushing energy prices lower.
Exxon and Chevron have also become lightning rods in the backlash against fossil fuels. As pressure mounts for the industry to do more to address environmental concerns, investors have increasingly fled the sector. Energy now accounts for just 3.8% of the S&P 500 Index, down from 16% in 2008.
Both companies are “competing in a sector that has systematically destroyed value for investors over the past decade”, said Mark Stoeckle, a Boston-based fund manager at Adams Funds with $2.5bn of assets. “It’s going to take time, and consistent results to convince the investing public” otherwise.
Exxon slumped 4.1% on Friday after fourth-quarter earnings trailed analysts’ estimates. Low natural gas and petrochemical prices meant it failed to generate enough cash to over its dividend for the period.
Still, CEO Darren Woods remains steadfast in his pursuit of a $35bn-a-year capital investment plan that aims to build oil and gas projects from Guyana to Mozambique. It’s a classic countercyclical strategy: Invest while prices are low and competitors are pulling back, and reap the rewards when the commodity cycle turns.
“While we would prefer higher prices and margins, we don’t want to waste the opportunity that this low price environment provides,” Woods said on a conference call. Exxon has the option of “using our financial capacity” or taking on debt to pursue its goals, he said.
“Chevron has a better balance sheet than ExxonMobil, but its growth portfolio is limited to the Permian and Tengiz. It will likely have to address the lack of low-cost opportunities over the next 12-18 months through an acquisition of exploration or development projects,” says analyst Fernando Valle.
In contrast, Chevron sees shale as having fundamentally changed the market, forcing the industry to adapt. The company reported its biggest quarterly loss in a decade after writing down the value of North American gas fields.
“We conditioned ourselves and our investors to believe that the only path to the future was by doing these great big projects,” Wirth said on a conference call. “We’re not nearly as reliant on those alone to sustain and grow cash flows into the future.”
The Chevron boss reaffirmed his commitment to cutting costs, increasing capital efficiency and churning out cash to buy back shares through commodity cycles. Flagship projects in far-flung foreign locations are largely on the back burner; the real gains are to be made in shale — or unconventional production, to use oil industry jargon — in west Texas.
“Grinding away on enormous unconventional positions may not be quite as glamorous as doing the big projects in terms of giving you a lot of things to talk about, but it really drives strong financial outcomes,” Wirth said.
While Chevron made a “brilliant decision” to walk away from a $32bn agreement to buy Anadarko Petroleum in 2019, there is lingering concern that the oil major may still seek a deal to bulk up for growth, according to Stoeckle.
Investors are concerned that its growth and spending levels are too low while Exxon’s are too high, he said.
Chevron’s stock fell 3.8% on Friday, the most in nine months. About $19bn was wiped off Exxon and Chevron’s market value on the day.
Former hedge fund manager and CNBC television host Jim Cramer summed up the mood in typically hyperbolic fashion.
“I’m done with fossil fuels. They’re done,” he said. “The world’s turned on them.”