Here’s a story about the integrated oil business as told through three numbers:
Total’s number, the smallest, may also be the shrewdest.
Exxon revealed its spending plans at its annual analyst day last week. This was a much longer affair than usual, as Exxon responded to a growing chorus of criticism:
Exxon’s setting of hard targets for things like return on capital and divisional earnings marks a big, welcome shift. Yet the new plans have done little for the stock; the gap between Exxon’s dividend yield and rival Chevron Corp.’s has actually widened slightly since the presentation.
For that, blame the capex guidance. While most majors are pledging to keep spending in check, Exxon is taking it up a gear:
Exxon argues it has a formidable set of projects, pointing to such goodies as offshore Guyana discoveries, as well as the Permian basin. The problem is that investors have seen this story before, and quite recently, with the oil majors. And while Exxon’s reputation might once have enabled it to simply be trusted to deliver, that is no longer the case.
On that front, a new target of raising production to five million barrels of oil equivalent a day by 2025 may actually prove counter-productive. While CEO Darren Woods stressed “this is not a volume driven plan,” the number raises memories of Exxon’s many earlier, and missed, growth targets. Above all, it leaves no room for the immediate resumption of what used to be its strong suit: share buybacks.
Not that these are a silver bullet in every case. Which brings us to Hess.
While Elliott Management has pushed successfully over the past five years for an overhaul of Hess’s portfolio, the stock’s initial pop has long since faded:
With Elliott calling for yet more restructuring, and CEO John Hess’s own position being questioned, the company announced another $1 billion cash-return to shareholders. That’s almost 7 percent of Hess’s market cap, and the stock is up about 4 percent since. Yet it’s hard to escape the feeling that this billion-dollar handout ought to have moved the needle a bit more.
The problem is that Hess faces the same issue Exxon has, only to a worse degree. Exxon is effectively asking shareholders to wait for several years while it proves it can spend huge sums and generate bigger returns on them. Even for Exxon, that’s a tough ask in today’s climate.
Hess is making the same appeal, only without Exxon’s reputation (however diminished), scale or portfolio. Hess is part owner of those Exxon-operated Guyana discoveries, so it gets to share in the spoils, but only down the road. In the meantime, it’s on the hook for its share of capex. Hence, the sudden generosity on buybacks to keep investors interested. As I wrote here, though, payouts work best when they’re an expression of strength, not an appeal for affection.
Total’s small deal in Libya is a wholly different beast. It is smaller, obviously, equating to just 0.3 percent of the French company’s market cap. More importantly, though, it both plays to Total’s strengths and fits with what investors want from oil majors.
Total, with its heft and long history in North Africa, can afford to take a calculated bet on Libyan oil production recovering further. Marathon -- which, like Exxon, Hess and many other U.S. peers, is pivoting back home -- cannot. Its Libyan business got little to no value in its stock price, especially with shale taking all the attention. Hence, Marathon reports its production numbers ex-Libya .
With a motivated seller, Total got a producing asset where virtually all the output is crude oil, for a price of just $2.25 per barrel of proved reserves and probably less than $1 per barrel of resources. Based on Marathon’s disclosure, the asset would pay back in nine years in terms of free cash flow at today’s oil price. But with Total projecting a one-third increase in production by 2020, it will likely be much shorter than that.
Getting reserves at a low cost and with a relatively quick payback is catnip to investors that have grown distrustful of integrated oil’s traditionally decades-long time horizons, especially with so much uncertainty around long-term demand. Exxon may well turn out to be a great stock to own by 2020, and even Hess may get its Guyana payday. Total’s opportunism feels more in tune with 2018, though.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal’s “Heard on the Street” column. Before that, he wrote for the Financial Times’ Lex column. He has also worked as an investment banker and consultant.
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