A $75 oil price doesn’t quite mean what it used to for the largest Western oil majors as they face up to energy transition pressures. Rather than jacking up capital expenditures on upstream projects, majors will instead use extra cash flow from higher prices to repair balance sheets and make right with investors demanding both emissions reductions and returns. There is scope for incremental capex increases, but most companies are operating within capital frameworks out to 2025 and are promising to stay disciplined. Both European and US majors now feel similar investor pressures to decarbonize (PIW Jun.4'21). The price increase could be a boon for the majors’ large divestment programs (PIW Aug.28'20). This could help them unload noncore assets and bring in cash needed to bolster balance sheets or add high-quality barrels or low-carbon businesses. "Those assets that we sell will be selling in a much higher price environment potentially and therefore will generate more proceeds," said BP CEO Bernard Looney, "which will enable us to make the transition a little bit easier."
With transition goals set and investor climate pressure rising, Royal Dutch Shell, TotalEnergies and BP won't stray from their strategies to chase higher oil prices. All three have gearing that is at the top end, if not above their comfort level. And investors are clamoring for more returns. Bumper cash flows will help them achieve their goals in both areas more rapidly. Europe's majors are looking to increase spending marginally in 2022, and higher prices could push that to the upper end of targeted ranges. But the top priority for additional investments is likely transition-related businesses in power, marketing and low-carbon fuels (related). Incremental capital could flow toward oil and gas projects that sit rock bottom on the cost and carbon curves, but volumes would replace declines elsewhere in the portfolio, not grow top-line production. "If the prices remain above this level, we can increase capex," said Total CFO Jean-Pierre Sbraire, noting that Total based its budget on $40 oil. "Having said that, and it's clear it's now in the DNA of Total, we want to maintain the discipline on capex." Shell will generate an additional $4 billion in free cash flow for every $10 increase in oil prices but plans to keep its upstream spending between $7 billion and $9 billion regardless of prices (PIW May7'21). "What we don't want to do is the sins of the past where we get excited by a short-term oil price rally," said Shell’s upstream director Wael Sawan.
This bull run in oil prices is exactly what Exxon Mobil envisioned when it embarked on a plan to boost production and spending in 2018. But last year's pandemic-driven bust forced the US giant to retreat from its growth dreams (PIW Jun.4'21). Its latest board defeat by activist Engine No. 1 means the company will have to balance any growth ambitions with the transition bent of its three new directors (PIW May28'21). The cash infusion from stronger prices will help cover its sizable dividend and help the company reduce its record debt. Exxon has a portfolio break-even of $65 including dividend payments, by Energy Intelligence estimates, but that does not include restarting its popular share repurchase program or paying down its sizable debt. Engine No. 1 founder Charlie Penner said Exxon’s recipe for success should "mean less oil and gas production going forward."
Chevron is unique among the majors in having low debt and a portfolio of short-cycle assets that could rapidly respond to higher prices. But with its Permian Basin production in decline this year after cost cutting, even a boost in spending there would return Chevron to its previous growth plans, not materially accelerate volumes. Chevron also has to reckon with investor-led climate pressures following majority support for a shareholder resolution asking the company to reduce its Scope 3 emissions. "Investors have told Chevron to decrease emissions to protect their assets against devastating climate change," said Mark van Baal of activists Follow This. "This means that business as usual is no option." CEO Mike Wirth has been clear that Chevron has no plans to enter renewables. "The returns are known and they're kind of single-digit returns," he said of renewable investments.
| Majors' Medium-Term Capex Adjustments |
| | Old
Guidance
($ billion) | New
Guidance
($ billion) | Notes |
| Chevron | $19-$22 | $14-$16 | New guidance through 2025.
Spending capped at $14 billion
this year. |
| Exxon | 30-35 | 20-25 | New guidance through 2025.
Likely to spend $16 billion
this year. |
| BP | 15-17 | 13-15 | New guidance holds until net
debt target achieved. Spending
capped at $16 billion thereafter. |
| Total | 16-18 | 13-16 | New guidance through 2025.
Spending capped at $12 billion
this year. |
| Shell | ~$30 | $19-$22 | Guidance in place until net debt
falls below $65 billion
(currently >$76 billion). |
Source: Company comments and presentations
|