(Bloomberg) — Exxon Mobil Corp. and Chevron Corp. are generating returns not seen since their heyday over a decade ago, with $58.7 billion handed to shareholders last year and more to come in 2024, even if crude prices drop. And yet, they’re struggling to compete in a stock market beholden to Silicon Valley.
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Chevron hit record production in 2023 while buying back 5% of its stock and forecasts oil and gas growth of as much as 7% this year, led by low-cost barrels from the Permian Basin. It was rewarded with a 3% bump in its shares Friday, slightly better than Shell Plc’s gain a day earlier. Exxon, which is gushing cash from the fast-growing oil discovery in Guyana, fell 0.4%.
Their stellar operational performance wasn’t enough to prevent them slipping further behind tech giants Meta Platforms Inc. and Amazon.com Inc., which surged 20% and 8% respectively. Meta, which already trades twice the price-to-earnings ratio of the oil giants, added $197 billion to its market value as it lifted buybacks and introduced a dividend. The owner of Facebook, Instagram and Whatsapp is now three times the size of Exxon.
“We are an essential industry to the global economy, an industry that’s been around for a long time and will be around for a long time in the future,” Chevron CEO Mike Wirth said on Bloomberg TV, adding that the company has increased its dividend for 37 consecutive years. “There’s a real value opportunity here for patient shareholders.”
The US is now the world’s biggest oil producer, pumping about 45% more than Saudi Arabia, in large part due to Exxon and Chevron’s frenetic drilling in the Permian Basin of Texas and New Mexico. And it’s a commodity still in high demand despite efforts to transition away, with consumption expected to rise through 2030 and perhaps beyond. But investors don’t seem to care. Energy makes up just 3.7% of the S&P 500 Index.
“It should be a signpost flashing green,” said Jeff Wyll, a senior analyst at Neuberger Berman, which manages about $440 billion. “How much smaller can the sector get given its importance in the global market?”
Equity investors appear to be sending a clear message that Big Tech is the future, and Big Oil is the past. They’re not wrong. Artificial intelligence and cloud computing offer decades of potential profit growth while the transition to lower carbon energy poses an existential threat to the oil majors. The cyclical nature of oil prices, and dependence on curtailed supply from Saudi Arabia to prop up the market, mean investors view oil companies’ cash flows as more volatile than their rivals in tech.
“For the sector to trade at a higher multiple, the investors need to view oil as moving back into an era of scarcity,” Wyll said. “We may be there in a few years, but we’re not there now.”
Exxon and Chevron are determined to build their business to withstand such swings, as they have done throughout their more than 140-year histories. Both companies are investing heavily in Guyana and the Permian, where oil can be pumped profitably at less than $35 a barrel, some $40 below current prices. Refining and petrochemicals provide natural hedges to oil while Exxon is expanding trading to boost profits.
It may be good business, but it’s a hard sell in this market, said Dan Pickering, founder and chief investment officer of Pickering Energy Partners.
“Meta announced a share repurchase authorization that’s essentially the size of Devon plus Diamondback. That makes people look,” Pickering said in an interview. “Chevron says, ‘We’re doing good in the Permian.’ That doesn’t make people look.”
And like all commodity markets, too much success can lead to their downfall. By growing Permian production by around 10% this year and next, Exxon and Chevron are adding to global supplies that risk outpacing demand. It also risks stealing market share from the Saudis, who crashed prices to flush marginal suppliers out of the market in 2014 and 2020.
For Wirth, those risks are real.
“We’re very committed to capital discipline through the cycle,” he said. “It’s an industry that at times hasn’t necessarily exhibited that, and I think it’s important our company and other companies remember the lessons of commodity markets.”
–With assistance from Mitchell Ferman and Alix Steel.
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