Big Oil Finally Ready To Boost Spending

All five international oil and gas majors expect to boost their capital spending next year, although capital discipline and higher returns to shareholders will remain the top priorities for ExxonMobil (NYSE:XOM), Chevron (NYSE:CVX), Shell (NYSE:RDSa), BP (NYSE:BP), and TotalEnergies (NYSE:TTE). 

Those oil majors—although Shell, BP, and TotalEnergies now prefer to be known as energy companies—have reported strong cash flows and earnings for the past two quarters as significantly higher oil and gas prices compared to last year boosted profits.  

Despite some of Big Oil reporting strongest earnings in years and record cash flows, capital discipline remains a key pillar of all future strategies. Increased capex plans for 2022 and onwards are not surprising considering the fact that in 2020, all firms slashed as early as in March their capital allocation guidance in response to the crash in prices in the pandemic. Now budgets are slightly higher than in 2021 and incremental investments are specifically going to core growth oil and gas projects with low breakevens and high returns and to low-carbon energy. 

Discipline Continues To Guide Spending 

Despite $80 oil, no one is splurging on investment these days, unlike in the years prior to the 2015 price crash, when companies were spending as if oil would stay at $100 a barrel forever.  

Sure, capex for 2022 is higher at all five majors compared to 2021 and 2020, but it’s nowhere near 2014 levels. Capital discipline is still the keyword in all earnings releases and calls, where higher dividends and share buybacks take precedence when it comes to allocating this year’s record cash flows. 

Exxon, Chevron, Shell, BP, and TotalEnergies are set to increase their combined capex programs in 2022 by at least $12 billion, according to estimates from Energy Intelligence based on company reports and earnings calls.  The increases are much smaller than the surge in the cash flow and earnings this year as the majors are set to primarily use the windfall to reduce debt and increase shareholder returns by raising dividends and repurchasing stock. 

Higher Low-Carbon Spending 

The five largest international firms are also raising capital spending on low-carbon energy, including the U.S. supermajors who differ from their European competitors in strategy by not being willing to invest in any solar and wind power generation. Instead, Exxon and Chevron plan to focus on renewable fuels and carbon capture and storage (CCS), both to cut their own carbon footprint and to develop in partnership regional CCS hubs in heavily industrialized areas.

Chevron, for example, said in September that it would triple its planned capital investment in lower carbon businesses to $10 billion through 2028, including $2 billion to lower the carbon intensity of its operations. 

Exxon said last week it expects its cumulative low-carbon investments to be around $15 billion from 2022 through 2027, a fourfold increase in a plan to raise total capex by at least $4 billion in 2022 compared to 2021. 

Exxon Plans Highest Capex Hike 

In reporting blockbuster earnings for Q3 last week, ExxonMobil’s said its 2021 capital program is expected to be near the low end of the $16 billion to $19 billion range. In the fourth quarter, the board of directors will formally approve the corporate plan, with capital spending anticipated to be in the range of $20 billion to $25 billion annually. The higher investment is underpinned by further appraisals and developments in Guyana and Brazil, Kathy Mikells, Senior Vice President and Chief Financial Officer, said on the Q3 earnings call last week. The Permian remains a top priority as well, where “we’re seeing that work that we’re doing out in the Permian deliver the same value for a lot less spend,” CEO Darren Woods said. 

The other majors also plan higher capex in coming years, although less than Exxon’s increase in spending.

Shell, for example, said in its strategy day in February that it would boost its cash capex to $23 billion-$27 billion per year, from $19-22 billion annually, when it brings net debt down to below $65 billion. The company did that in Q3, with net debt down by $8.2 billion to $57.5 billion, thanks to improved macroeconomic environment and commodity derivatives inflows. 

Shell’s higher capex was contingent on reducing debt and increasing shareholder returns first. 

TotalEnergies, which sees net investments in 2021 at $13 billion—including $3 billion on renewables and electricity—expects to keep investment discipline, with its capex program at $13-15 billion per year for 2022-2025, the French firm said in September in its strategy presentation.  

Chevron, which lowered 2021 capex guidance to $12 billion-$13 billion, has guidance of $15 billion to $17 billion for 2022 through 2025, CFO Pierre Breber said on the Q3 earnings call on Friday after Chevron reported its biggest quarterly profit since 2013 and its highest free cash flow on record. 

“We do expect higher capex in the fourth quarter and next year,” Breber said. 

Despite higher spending guidance, Big Oil continues to be conservative in capital allocation now that shareholders want returns and ESG investors want accountability. 

“US$80/bbl oil gives companies options, and a chance to do it all—return cash to shareholders, maintain oil and gas investment, and accelerate investment in low carbon opportunities. The current upcycle presents a golden opportunity to reposition for a very different future,” Kavita Jadhav, research director at Wood Mackenzie, said last month.