Exxon and Chevron deals point to the end of easy oil – 10/28/2023 – Market

Exxon Mobil Corp. and Chevron Corp. have spent the last few days explaining to investors why they want to spend a combined US$114 billion (R$571.6 billion) on two mega-businesses. On Friday (27), its earnings reports revealed the reasons why.

Exxon’s oil production is near its lowest level since its merger with Mobil Corp. for more than two decades. Chevron disclosed obstacles to key growth projects in Kazakhstan and the Permian Basin, West Texas and New Mexico.

In short, the days of easy growth in oil production are over.

The market reaction was quick and brutal. Chevron fell nearly 7%, and Exxon closed 1.9% lower, even as oil prices rose due to tensions in the Middle East. For veteran shale oil financier Dan Pickering, the shareholder response reveals concerns about the fossil fuel business, especially when compared to other sectors such as technology.

“Welcome to the oil field,” said Pickering, founder of Houston-based Pickering Energy Partners. Investors “don’t believe this business can be sustainable, they don’t believe in the discipline of these companies. They’d rather look at Amazon today, or maybe any day.”

Unlike their European rivals, Exxon and Chevron have invested heavily in fossil fuels during the ESG boom of the past four years. Still, new supplies of crude oil have been hard to find. At sea, exploration is expensive and unpredictable. US shale fields are experiencing a decline in production growth as the best areas have already been fractured.

Both companies made their recent acquisitions from a position of strength compared to where they were during the height of the pandemic. A surge in energy prices last year translated into record profits. Their stock prices rose, giving Exxon and Chevron executives hard currency to buy smaller competitors.

Exxon’s $62 billion purchase of Pioneer Natural Resources Co., announced two weeks ago, will make it the dominant producer in the Permian. Chevron said on Monday (23) that it is buying Hess Corp. for $52 billion, giving it a stake in one of the world’s largest and fastest-growing oil projects in Guyana.

Both deals are all-stock transactions with small acquisition premiums and are the oil industry’s biggest in more than eight years. As such, they threatened to overshadow Exxon and Chevron’s earnings reports. But existing operations did not escape scrutiny.

Chevron has revealed yet another delay and cost increase at its $45 billion Tengiz project in Kazakhstan, and that Tengiz’s cash flow will be about $1 billion lower than previously forecast when it finally comes into operation. in 2025.

Exxon has a much stronger growth profile, having already established a base in Guyana and sold higher-cost assets. But the Texas oil giant’s output averaged just 3.69 million barrels of oil equivalent per day in the third quarter, near a two-decade low, as growth in Guyana and the Permian failed to offset the impact of asset sales, cuts in OPEC (Organization of Petroleum Exporting Countries) production and the natural drop in productivity that affects all oil fields.

Making matters worse, Exxon said chemicals profits, long seen as a key area of ​​growth for Big Oil, fell 70% from the previous quarter.

“The industry is still recovering from the impact of the pandemic and the lower levels of capital that have been invested across the industry to offset the depletion that has been occurring,” Exxon CEO Darren Woods said in an interview with Bloomberg TV.

Chevron presented a list of technical problems in the Permian: limits on wastewater production, high levels of carbon dioxide in its natural gas and production partners struggling to frack. While smaller competitors have complained of similar problems as the Permian expanded to become the world’s largest shale field, it’s unusual to hear these kinds of details from an oil giant.

“This is an example of the basin maturing,” Pickering said. “What’s kind of surprising is that Chevron brought this to attention, because normally they’re a big company and they wouldn’t go into the details so much.”

Resolving such issues will likely increase costs. The global oil and gas industry is expected to increase spending by about 10% this year to $545 billion, according to JPMorgan Chase & Co., on top of a 34% increase last year. Earlier this week, Halliburton Co. CEO Jeff Miller reminded investors of one of the industry’s biggest challenges, especially in shale. “The reality is that you need to work harder to stay at the same level.”