Amid a worldwide surplus of crude oil that has caused international oil prices to drop by roughly 25% from their peak levels, ExxonMobil and...
Amid a worldwide surplus of crude oil that has caused international oil prices to drop by roughly 25% from their peak levels, ExxonMobil and Chevron, the two biggest U.S. oil corporations, revealed their third-quarter results for this year on the 31st of the previous month. Both firms reported weaker key financial indicators, such as revenue and net profit, when compared to the same period in the prior year. ExxonMobil achieved revenue of $85.3 billion (about 125 trillion South Korean won) during the third quarter of this year, representing a 5.3% decline from the same time last year. Net profit decreased by 12.3% to $7.5 billion. Chevron's revenue fell by 1.9% year-over-year to $49.7 billion, while net profit dropped by 21.1% to $3.5 billion.
The drop in profitability was linked to lower profits in the chemical industry because of a worldwide economic downturn and significant expenses from corporate acquisitions, although the main reason was the shrinking profit margins due to low oil prices. Still, both companies reached record-high production levels during the third quarter. Why did production rise even with lower margins? WEEKLY BIZ examined the third-quarter output and response approaches of the two companies functioning in the tough setting of low oil prices, using earnings reports and conference calls.
◇ Document Crude Oil Output
ExxonMobil generated an average of 4.77 million barrels of crude oil daily globally during the third quarter, representing a 4% rise compared to the same quarter in the previous year and marking the highest level since the Exxon and Mobil merger. This unprecedented production was fueled by higher output in the Permian Basin, the largest oil field in the United States, and Guyana in South America. The offshore oil field in Guyana produced almost 700,000 barrels per day, while the Permian Basin saw production nearing 1.7 million barrels per day, both achieving new records. Specifically, the Yellowtail (Yellowtail) project in Guyana's fourth block, which started in the third quarter—four months earlier than planned—helped achieve the record production levels.
ExxonMobil's chief executive, Darren Woods, said, "Making ongoing investments to boost output despite changes in oil prices is a long-term approach aimed at maintaining the company's consistent cash flow across different stages of the market cycle."
◇ ExxonMobil Maintains Strong Investment Strategy
ExxonMobil and Chevron exhibited significantly different strategic methods within the same market scenario of declining oil prices. ExxonMobil, in particular, intends to maintain its aggressive investments to capture long-term growth prospects, regardless of temporary price changes. CEO Woods stated, "We recorded the highest earnings per share (EPS) this quarter when compared to other quarters with comparable oil prices," and continued, "Our focus is on projects that can deliver double-digit returns even if oil prices drop to $35 per barrel."
ExxonMobil's capital spending for the third quarter amounted to $8.6 billion, representing an increase of $2.2 billion compared to the same period in the previous year. The company remains committed to major expansion initiatives even though oil prices are hovering close to their lowest levels in four years. Nonetheless, there are concerns regarding the less favorable aspects of its aggressive investment strategy. HSBC analyst Kim Fustier noted, "Although ExxonMobil has performed well in executing its projects, net debt has risen once more," and added, "This indicates that the company is unable to fund dividends and share repurchases exclusively through free cash flow (FCF)." Free cash flow refers to the amount of cash available for dividends, debt reduction, and reinvestment after subtracting capital expenditures from the cash generated through operational activities.
Fustier stated, "Although there were positive earnings, the ongoing rise in net debt over consecutive quarters requires consideration," noting, "With oil prices currently at $65–70 per barrel, ExxonMobil's shareholder returns are not entirely supported by cash flow." Indeed, although ExxonMobil's free cash flow for the quarter amounted to $6.3 billion, the total of stock repurchases and dividends combined reached $9.4 billion.
◇ Chevron Prioritizes Cash Flow Generation
On the other hand, Chevron is focused on maximizing cash flow from its current assets to improve its stability during times of declining oil prices. With CEO Mike Wirth at the helm, the company is reorganizing to emphasize cash generation, allowing it to better handle the usual up-and-down patterns in oil prices. Even without considering the impact of integrating Hess assets, Chevron aims to boost production by 7% this year and another 5% by 2026. Significantly, high-profit oil fields like the Tengiz field in Kazakhstan and deep-sea projects in the Gulf of Mexico are designed to stay profitable even if oil prices drop to $20 per barrel.
Chevron is modifying its production growth rates in capital-heavy shale areas such as the Permian Basin and the Denver-Julesburg Basin, while cutting its worldwide staff by 20% and enhancing operational efficiency to increase cash flow. Chief Financial Officer Ameer Bonney stated, "The cash flow milestone we anticipated took place in the third quarter," and added, "The Hess assets are already making a substantial contribution to our performance."
Initially, the market showed preference for Chevron compared to ExxonMobil's "aggressive investment" strategy. Despite both firms surpassing Wall Street forecasts regarding EPS for the third quarter, Chevron's stock increased by as much as 3.5% during intraday trading, whereas ExxonMobil's declined by up to 1.8%.
◇ Is the Rise in Output Likely to Continue?
Two days following the earnings announcements from ExxonMobil and Chevron, the two leading U.S. oil corporations, eight OPEC+ member nations chose to stop further production hikes for the first quarter of the upcoming year. The energy ministers from these eight countries convened via video conference on the 2nd and opted to raise crude oil output by 137,000 barrels per day for the next month, while holding back on any production increases between January and March of the following year, taking into account seasonal considerations. The production rise in December remains consistent with that of October and November, representing a small amount when compared to the 547,000 barrels per day increase observed in August and September.
After adopting a strategy focused on increasing production in April, they completely removed the "additional voluntary production cuts" of 2.2 million barrels per day in September. During the video call, they emphasized their ability to partially or fully reinstate the separate voluntary production reductions of 1.65 million barrels per day based on market circumstances. Should this result in a turnaround in the declining oil price trend, it may help safeguard the profits and cash flow of ExxonMobil and Chevron's primary exploration and production divisions, possibly boosting their earnings.
Some analysts believe that U.S. restrictions on Russia could hinder Russia's ability to boost its output. The International Energy Agency (IEA) predicts that crude oil supply will surpass demand by as much as 4 million barrels daily in the coming year, which is roughly 4% of worldwide consumption. The 22 OPEC+ member nations are set to convene on the 30th to deliberate on changes to next year's production limits.
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