Image Source: Exxon Mobil Corporation – Third Quarter 2019 Earnings Presentation
By Callum Turcan
In alphabetical order by ticker: COP, CVX, RDS, TOT, XOM
ConocoPhillips
On October 29, upstream super-independent ConocoPhillips (COP) reported third quarter earnings for 2019. Its adjusted underlying oil and gas output rose by 7% year-over-year to over 1.3 million BOE/d in the quarter. Conoco sold off most of its UK operations (through a deal announced in April 2019), which were primarily represented by mature offshore oil and gas fields and a stake in the Clair oilfield, raising approximately $2.2 billion in net cash proceeds when the deal was completed in the third quarter. That transaction will see Conoco’s upstream output move lower sequentially in the fourth quarter of 2019, as management continues to shift Conoco’s geographical focus. It appears Conoco’s remaining UK assets include a stake in the Teesside oil terminal and its commercial trading business.
During the first nine months of 2019, Conoco generated $8.1 billion in net operating cash flow and spent $5.0 billion on capital expenditures, allowing for $3.1 billion in free cash flows. Dividend payouts during this period came out to $1.0 billion, which were covered by free cash flow, while $2.8 billion in share buybacks during this period were in part funded by the balance sheet (keeping divestment proceeds in mind). Conoco ended the third quarter with $8.1 billion in cash, cash equivalents, and short-term investments on hand on top of its equity stake in Cenovus Energy Inc (CVE) that was worth $2.0 billion at the end of this period. Total debt of $14.9 billion at the end of the third quarter is manageable when taking Conoco’s cash-like balance into account, and this debt load has fallen substantially over the past several years which we really appreciate.
As a company whose primary operations involve producing oil, natural gas (including liquified natural gas or ‘LNG’), and natural gas liquids from formations of varying complexities all over the world, Conoco is very exposed to changes in market dynamics. In particular, swings in raw energy resource prices and the benchmarks that help set those prices. Since the most recent downturn in raw energy prices began in late-2014, management has slimmed the company down to better allow for Conoco to adjust going forward. Conoco exited the deepwater exploration space a couple of years ago to trim down its annual expenses in a meaningful way but continues to invest in existing discoveries.
Another part of this transformation involved selling off most of Conoco’s oil sands operations in 2017 to Cenovus, save for Conoco’s 50/50 Surmont JV with Total (TOT), and using a good chunk of those divestment proceeds to pare down Conoco’s debt load. That deal is how Conoco ended up with a sizable equity stake in Cenovus, a stake that’s non-strategic and will likely be sold off in the future as market conditions allow.
Chevron Corporation
On November 1, Chevron Corporation (CVX) reported third quarter earnings for 2019. The big story on the upstream front remains its Permian Basin operations, particularly on the “unconventional” level of things (combining hydraulic fracturing and horizontal drilling to unlock hydrocarbon resources from shale, limestone, and other formations).
Chevron’s unconventional upstream operations in the Delaware and Midland sub-basins within the Permian Basin, a massive region that stretches across West Texas and Southeast New Mexico, rose by 117,000 barrels of oil equivalent per day in the third quarter on a year-over-year basis. At 455,000 barrels of oil equivalent per day (third quarter of 2019 levels), Chevron is well on its way to pumping out ~1 million barrels of oil equivalent per day by 2023-2024 depending on market conditions.
Output from the massive Gorgon and Wheatstone LNG facilities and related upstream operations in Australia (Chevron owns a large economic stake in both of these ventures) continues to ramp up, providing a nice uplift to Chevron’s company-wide performance. We caution that LNG spot prices and LNG realizations under long-term contracts both remain subdued due to surging LNG supply and lackluster pricing seen at oil price benchmarks. Long-term growth in global natural gas demand may improve LNG realizations over time.
When it comes to Chevron’s financials, the firm generated $21.7 billion in net operating cash flow during the first nine months of 2019 while spending $9.9 billion on capital expenditures. Free cash flow of $11.8 billion fully covered $6.7 billion in dividend payments and $1.8 billion in net purchases of its common stock. Chevron ended the third quarter with $11.8 billion in cash, cash equivalents, and marketable securities on hand versus $7.8 billion in short-term debt and $25.1 billion in long-term debt.
Royal Dutch Shell plc
On October 31, Royal Dutch Shell plc (RDS.A) (RDS.B) reported third quarter earnings for 2019. Compared to the same quarter a year ago, Shell’s upstream oil and gas production fell by 2% due to production losses from divestments, turnaround activity, and “weaker operational performance” which offset the uplift from ramping up production at some of its growth assets. Excluding “portfolio impacts”, Shell’s upstream oil and gas production rose by 2% in the third quarter on a year-over-year basis according to management. Additionally, Shell’s downstream operations were negatively impacted by elevated turnaround activity at its European petrochemical division last quarter.
During the first three quarters of 2019, Shell generated $31.9 billion in net operating cash flows while spending $16.3 billion on capital expenditures, allowing for $15.6 billion in free cash flows. Shell spent $11.5 billion covering cash dividends to its shareholders during the first nine months of 2019. Additionally, Shell allocated $7.4 billion towards repurchasing its stock, with most of those repurchases funded by “excess” free cash flow (after covering the dividend) but a portion of those buybacks were funded by the balance sheet. Management launched a $25.0 billion share buyback program back in July 2018, with Shell noting approximately $12.0 billion of that program had been utilized as of its third quarter report. The goal is complete the buyback program by the end of 2020, but that plan is now in doubt.
At the end of the third quarter, Shell was sitting on $15.4 billion in cash and cash equivalents versus $12.8 billion in short-term debt and $76.1 billion in long-term debt, largely a product of its massive ~$53 billion purchase of BG Group that was completed in 2016. Years earlier in early-2014, Shell completed its ~$4 billion purchase of some of Repsol’s (REPYY) LNG operations. Going forward, Shell’s management team thinks the combination of low raw energy resource prices and material dividend obligations will make the task of Shell achieving a gearing ratio of 25% while completing its aforementioned share repurchase program by the end of 2020 a tough (if not impossible) endeavor. Here’s what CEO Ben van Beurden had to say in Shell’s latest earnings report (emphasis added):
“This quarter we continued to deliver strong cash flow and earnings, despite sustained lower oil and gas prices, and chemicals margins. Our earnings reflect the resilience of our market-facing businesses and their ability to capitalise on market conditions, including very strong trading and optimisation results this quarter. Our intention to buy back $25 billion in shares and reduce net debt remains unchanged. The prevailing weak macroeconomic conditions and challenging outlook inevitably create uncertainty about the pace of reducing gearing to 25% and completing the share buyback programme within the 2020 timeframe.”
Shell’s downstream (refining and petrochemical) operations offer a degree of support when its upstream segment falters due to low raw energy resource prices, but those downstream operations are also exposed to market forces. In particular, Shell’s petrochemical margins have been coming under fire lately in Asia and Europe.
Total SA
On October 30, Total (ticker TOT as noted previously) reported third quarter earnings for 2019. The French energy giant’s ‘Exploration and Production’ segment saw its production base grow by 3% year-over-year last quarter to 2.5 million barrels of oil equivalent per day. Growth at this segment’s liquids production offset a mild decline seen at its natural gas production. Total’s ‘Integrated Gas, Renewables, and Power’ segment reported strong year-over-year growth at both its LNG sales and LNG production (made possible by this segment’s gas and liquids output jumping year-over-year to ~0.5 million barrels of oil equivalent per day). That growth was assisted by the startup of the Ichthys LNG project in Australia last year, with Total owning a large stake in that venture. Total’s ‘Refining and Chemicals’ segment had to contend with elevated maintenance activity last quarter.
Total exited the third quarter with $27.5 billion in cash and cash equivalents on hand versus $14.6 billion in current borrowings and $47.9 billion in long-term borrowings. During the first nine months of 2019, Total’s net operating cash flows of $18.1 billion less its $7.8 billion in capital expenditures allowed for $10.3 billion in free cash flows which fully covered $4.8 billion in dividend payments to shareholders and $2.2 billion share repurchases.
Exxon Mobil Corporation
On November 1, Exxon Mobil Corporation (XOM) reported third quarter earnings for 2019. Its upstream output in the quarter rose by 3% year-over-year to 3.9 million barrels of oil equivalent per day, led by strong liquids production growth. For reference, liquids production tends to be more economical than natural gas production, depending on the circumstances of course. Like Chevron, Exxon Mobil is investing heavily into its unconventional Permian Basin operations to churn out upstream growth with Exxon Mobil’s Permian output up 72% year-over-year last quarter. Exxon Mobil has struggled this past decade growing its upstream output as production declines from mature fields offset gains elsewhere.
Going forward, Exxon Mobil is banking on its massive oil discoveries off the coast of Guyana (a small nation in the northern part of South America) to propel its upstream production base even higher. Exxon Mobil is targeting a start-up at the Liza Field this December (first-oil is set for either late-2019 or early-2020), which is being developed by an FPSO (floating production storage offloading) facility. The first phase of this development has 120,000 barrels of daily crude oil production capacity, with the second phase (already sanctioned) set to add 220,000 barrels of daily crude oil production capacity to the region. When it’s all said and done, Exxon Mobil and its partners Hess Corporation (HES) and CNOOC Ltd (CEO) see the region producing around 750,000 barrels of crude oil per day by 2025 (made possible through future upstream developments, on top of the planned Liza Phase 1 and Liza Phase 2 projects).
Exxon Mobil ended the third quarter with $5.4 billion in cash and cash equivalents on hand versus $21.2 billion in notes and loans payable and $26.0 billion in long-term debt. During the first nine months of 2019, Exxon Mobil generated $23.4 billion in net operating cash flow while spending $17.7 billion on capital expenditures. Free cash flow of $5.7 billion did not fully cover $10.9 billion in dividend payments to shareholders and $0.4 billion in share buybacks during this period. Exxon Mobil’s free cash flows are pressured by weak raw energy resource realizations on the upstream front and its growth ambitions in Guyana, the Permian Basin, and elsewhere (due to the capital expenditure requirements to see those endeavors come to fruition).
Concluding Thoughts
As long as raw energy resource prices remain lackluster, the upstream divisions of the major energy giants will continue to generate far less cash flows than they did during the boom period (2010-2014). For Chevron, Shell, Total, and Exxon Mobil, their downstream operations offer a degree of stability but their large net debt positions and hefty capital expenditure budgets will continue to pressure their financials for some time. While Conoco doesn’t possess downstream operations anymore after the split with Phillips 66 (PSX) in 2012, management’s focus on net debt reduction and free cash flows post-2014 puts COP in a better position than most of these bigger integrated peers (particularly CVX, RDS and XOM). That being said, we don’t include Conoco in any of our newsletter portfolios in part due to its lack of a “natural hedge” (downstream operations) and its direct exposure to raw energy resource prices.
BP plc (BP) continues to represent one of our favorite plays in the energy space and shares of BP are included in our simulated High Yield Dividend Newsletter portfolio. We like BP’s cash flow profile, its stellar operational execution of late (upstream projects are consistently getting turned online under-budget and ahead of schedule), and its impressive downstream asset base. Members interested in reading more about why we like BP should check out this piece here, and if you may wish to add the High Yield Dividend Newsletter to your membership, please click here. Shares of BP yield 6.3% as of this writing and our fair value estimate of $45 per share of BP is comfortably above where shares are currently trading at.
Oil & Gas Majors Industry – BP COP CVX TOT RDS.A/RDS.B XOM
Refining Industry – HES HFC MPC PSX VLO
Independent Oil & Gas Industry – APA COG CLR DVN EOG OXY PXD
Oil & Gas Pipeline Industry – ENB ET EPD KMI MMP
Related ETFs: XLE, VDE, IEO, OIH, PXI
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