Last week, ExxonMobil (NYSE:XOM) reported second-quarter 2021 earnings in one of Big Oil’s most anticipated scorecards this earnings season. The largest oil and gas company in the United States great profit made that proved that the worst for the US shale industry could finally be in the rearview mirror.
Exxon’s second quarter profit rose to a profit of $4.7 billion after a loss of $1.1 billion in the year-ago quarter, as revenue more than doubled to $67.7 billion (+107.7 % year on year), with both numbers beating Wall Street’s expectations.
Exxon said its impressive profits were driven by strong demand for oil and natural gas and the best quarterly contributions in chemicals and lubricants.
The company was able to achieve those results despite declining production: total production in the second quarter decreased by 2% Y/Y to 3.6 million boe/day, despite production volumes in the Permian Basin declining 34% Y/Y to 400K boo/day are up.
Exxon’s second-quarter production clip marks the lowest level since the 1999 merger that created the oil and gas giant we know today.
Meanwhile, H1 Capex clocked in at $6.9 billion, with full-year spending expected to fall at the lower end of the $16 billion to $19 billion target range.
Bullish for Exxon
Exxon says cash flow from operating activities of $9.7 billion was the highest in nearly three years and sufficient to pay off capital expenditures, dividends and debt.
But wayward shareholders seem unimpressed, bidding down XOM shares after the company failed to announce a share buyback program.
While Chevron (NYSE: CVX), shell (NYSE:RDS.A), and TotalEnergies (NYSE:TTE) have all announced a return to share buybacks during the current earnings season, Exxon has chosen to pay off debt rather than reward shareholders. Exxon suspended buybacks in 2016 due to one of its most aggressive shale expansions, particularly in the Permian.
WSJ heard on the street‘s Jinjoo Lee says Exxon has less flexibility than its peers thanks to years of overspending followed by a brutal 2020. This has left the company in a vulnerable position, and now Exxon has little choice but to cut its debt levels, which have recently reached record highs.
Fortunately for XOM’s shareholders, CEO Darren Woods has reassured investors that restoring buybacks is “on the table,” although he has reiterated that “restore the strength of our balance sheet, reduce debt to a level equivalent to a strong double A rating” remains a top priority.
But overall, Exxon’s declining production is the way to go in this environment.
Clark Williams-Derry, energy finance analyst at IEEFA, a nonprofit, and Kathy Hipple, told CNBC that there is a “huge degree” of investor skepticism about the business models of oil and gas companies, thanks to the deepening climate crisis and the urgent need to move away from fossil fuels. Indeed, Williams-Derry says the market likes it when oil companies shrink and don’t go all the way for new production, but instead use the extra money generated by improved commodity prices to pay off debt and reward investors.
Investors have been watching Exxon closely after the company lost three board seats to Engine No. 1, an activist hedge, in a stunning proxy campaign a few months ago. Engine No. 1 told the Financial times that Exxon will have to reduce the production of fossil fuels for the company to position itself for long-term success. “What we’re saying is, make plans for a world where the world may not need your barrels,Engine No. 1 leader Charlie Penner told FT.
In fact, Exxon has rapidly ramped up production in the Permian, where it targets a production clip of 1 million barrels per day at cost of only $15 per barrel, a level only seen in the giant oil fields of the Middle East. Exxon reported that production volumes in the Permian Basin were up 34% year-on-year to 400K boo/day, and could reach the 1 million barrels per day target in less than five years.
Bullish for US shale
After years of underperformance amid weak earnings, the US shale sector remains ahead of schedule: one of his best years ever.
According to Rystad Energy, the U.S. shale industry is on track to reach a major milestone in 2021, with U.S. shale producers on track for record hydrocarbon revenues of $195 billion, before taking into account hedges in 2021 as WTI futures lose their strength. continue to run and average at $60 a barrel this year and natural gas and NGL prices remain stable. The previous record for pre-hedge revenue was $191 billion in 2019.
Rystad Energy says cash flows are likely to remain healthy because another critical item isn’t keeping pace: capital expenditures.
Shale drillers have a history of aligning their capital expenditures with the strength of oil and gas prices. However, Big Oil is dropping the old script this time.
Rystad says that while hydrocarbon sales, cash from operations and EBITDA for tight oil producers will all likely test new all-time highs if the WTI averages at least $60 a barrel this year, capital spending will see only moderate growth, as many manufacturers remain committed to maintaining operational discipline.
ExxonMobil has been one of the most aggressive shale drillers for years with huge expenditures and capital expenditures. Fortunately, the company is no longer eager to maintain that tag, which is bullish for the US shale sector.
There is already a growing fear that a full return of US shale due to improved commodity prices could cloud the waters for all
According to an analysis by the authoritative Oxford Institute for Energy Studies, rising oil prices could cause a significant return of US shale to the market in 2022, potentially disrupting the delicate rebalancing of the global oil market.
“As we enter 2022, the US shale response becomes a major source of uncertainty amid an uneven recovery among shale players and players alike. As in previous cycles, US shale will continue to be a key driver of market performance‘, say institute director Bassam Fattouh and analyst Andreas Economou.
Obviously, many investors prefer this to happen later rather than sooner – and so far there is evidence that this is the most likely trajectory.
By Alex Kimani for Oilprice.com
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