Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) are generating profits not seen since their heyday more than a decade ago, handing over $58.7 billion to shareholders last year, even as oil prices fall. More profits are expected in 2024. Drop it. Yet they struggle to compete in a stock market that benefits from Silicon Valley.
Chevron expects record production in 2023 while buying back 5% of its own inventory, and oil and gas growth of up to 7% this year, driven by low-cost barrels from the Permian Basin. The stock rewarded itself with a 3% rise on Friday, slightly outpacing Shell’s rise the previous day. Exxon, which is spending billions on oil discoveries in fast-growing Guyana, fell 0.4%.
The company’s strong operating performance wasn’t enough to prevent it from falling behind tech giants Meta Platforms Inc. and Amazon.com Inc., which soared 20% and 8%, respectively. Meta, which already trades at twice the price-to-earnings ratio of the oil giants, has increased its market capitalization by $197 billion as it expands share buybacks and introduces a dividend. The owner of Facebook, Instagram and Whatsapp is now three times the size of Exxon.
© Provided by Bloomberg“We are an essential industry to the global economy, we have been here for a long time, and we will be here for a long time,” Chevron CEO Mike Wirth said on Bloomberg TV, adding that the company had increased its dividend. Ta. 37 consecutive years. “For patient shareholders, there is an opportunity here with real value.”
The United States is currently the world’s largest oil producer, pumping out about 45% more crude than Saudi Arabia, largely due to Exxon and Chevron’s intense oil production in the Permian Basin in Texas and New Mexico. This is due to excavation. And it remains a high-demand commodity despite efforts to disengage, with consumption expected to increase through 2030 and perhaps beyond. But investors don’t seem to care. Energy accounts for only 3.7% of the S&P 500 index.
“It should be a flashing green signpost,” said Jeff Will, senior analyst at Neuberger Berman, which manages about $440 billion. “How far can this sector shrink given its importance in the global market?”
Stock investors seem to be sending a clear message that Big Tech is the future and Big Oil is the past. they are not wrong. Artificial intelligence and cloud computing offer decades of potential profit growth, but the transition to low-carbon energy poses an existential threat to the oil majors. Investors expect oil companies’ cash flows to be more volatile than their technology rivals due to the cyclical nature of oil prices and their dependence on supply cuts from Saudi Arabia to support the market. ing.
© Provided by Bloomberg“For this sector to trade at higher multiples, investors need to believe we are returning to the era of oil scarcity,” Will said. “We might get there in a few years, but we’re not there right now.”
Exxon and Chevron are determined to build businesses that can withstand such fluctuations, as they have throughout their more than 140-year history. Both companies are investing heavily in Guyana and the Permian region, where they can profitably mine for less than $35 a barrel, about $40 below current prices. Refining and petrochemicals provide a natural hedge against oil, while Exxon is expanding its trade to boost profits.
© Provided by BloombergDan Pickering, founder and chief investment officer of Pickering Energy Partners, said it may be a good business, but it’s a tough sell in this market.
“Meta announced a share buyback authorization that is essentially Devon plus Diamondback, and that’s what catches people’s attention,” Pickering said in an interview. “Chevron says, ‘We’re doing well in the Permian.'” That’s not what people see. ”
And as with all commodity markets, too much success can lead to downfall. Exxon and Chevron are increasing Permian production by about 10% this year and next, increasing global supply that risks exceeding demand. It also risks taking market share from Saudi Arabia, which crashed prices in 2014 and 2020 to force marginal suppliers out of the market.
For Wirth, those risks are real.
“We’ve been very committed to capital discipline throughout the cycle,” he said. “I think it’s important that we and other companies don’t forget the lessons of the commodity market, because this industry hasn’t always shown that.”
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