Author: Bary, Andrew
Barron's (Online) ; New York (May 9, 2022).
U.S. energy companies are holding the line on capital spending and energy production this year despite higher oil and gas prices , and entreaties from Washington to boost production.
That's the takeaway from first-quarter guidance from a wide range of energy companies—including exploration and production companies and integrated oils—tracked by Morgan Stanley analyst Devin McDermott.
"E&Ps have remained disciplined through 1Q earnings season, reiterating prior plans calling for low or no production growth in 2022," wrote McDermott in a client note Monday.
Investors have pushed for that spending restraint after a disastrous period from 2015 to 2019 when the industry far outspent cash flow, and generated poor returns.
Energy stocks are having one of their worst days of 2022 with the S&P 500 index down over 2% and the Energy Select Sector SPDR exchange-traded fund (XLE) off 5.4% to $78.47. Exxon Mobil (XOM) stock is off 5.2% to $86.91, and Chevron (CVX) stock is down 4.6% at $162.91. Crude oil is down 4% to $105 a barrel.
Industry capital expenditures are expected to total about 35% of cash flow from operations this year, compared with 125% from 2015 to 2019, and free-cash-flow yields in the energy sector are nearly four times the broader market in 2022 and 2023, McDermott estimates.
Energy companies continue to emphasize capital returns to shareholders including dividends—both regular and variable ones linked to profits—and share buybacks.
A group of about 16 large E&P companies plans to spend a total of $35.8 billion this year on capital expenditures, up about $1 billion from prior guidance, due mainly to higher inflation.
The big North American integrated companies led by Exxon Mobil and Chevron plan to spend a total of $45.2 billion this year, little changed from prior guidance of $45 billion.
A group of 11 oil-focused E&Ps plans to produce about 6 million barrels a day of crude and equivalents this year, virtually unchanged from prior guidance, while five leading gas-oriented E&P are looking to produce 19.2 billion cubic feet of gas and equivalents a day in 2022, unchanged from prior guidance, according to McDermott. The integrated companies plan to produce a total of 9.31 million barrels a day of crude and equivalents this year.
An increasing number of E&P companies are paying both regular dividends and variable payouts keyed to profits. These include Diamondback Energy (FANG), EOG Resources (EOG), ConocoPhillips (COP), Coterra Energy (CTRA), Devon Energy (DVN), and Pioneer Natural Resources (PXD).
McDermott noted that Exxon Mobil has tripled its stock-buyback program to up to $30 billion through 2023 while Chevron sees its buybacks at the high end of an annual range of $5 billion to $10 billion. Both companies have dividend coverage of 350% or more this year assuming crude prices at $100 a barrel. Exxon Mobil stock now yields 3.9%, and Chevron stock, 3.5%.
McDermott favors Exxon Mobil to Chevron.
"This preference for XOM is due to: 1) more attractive valuation, 2) greater rate of change in free cash flow with ongoing execution on a cumulative [approximately] $9 billion of cost cuts ([about] $5 billion to date with another $2 billion in 2022, and $2 billion in 2023), and 3) greater leverage to downstream, which we expect will drive upside to cash flows as demand recovers through 2022," he adds. "In addition, incorporating newly announced share-repurchase targets, XOM now offers an [about] 8% total yield (dividends + buybacks), above CVX at [about ]7%."
Write to Andrew Bary at email@example.com
Exxon, Chevron, and Other Energy Producers Are Exercising Restraint
Credit: Andrew Bary