Be a skinny and mean cash machine
Crude oil and natural gas prices are at multi-year highs, but executives at major oil companies can’t be quiet these days, especially not Exxon Mobil.
Thanks to rising energy prices, oil producers experienced a financial crisis in the last quarter. Exxon’s third-quarter operating cash flow was $ 12.1 billion, the highest since the third quarter of 2014, when Brent crude oil traded closer to $ 100 a barrel . Its counterpart Chevron on Friday reported $ 8.6 billion in operating cash flow and record free cash flow.
What to do with this money is a vital question for Exxon, as it is for other producers. The first element of all spending – cash returns to shareholders – will determine which investors stick around today, while the second element, capital spending, will determine the path of future returns.
The first seems to be easier to understand: investors just want more. Shares of Canadian oil producer Suncor Energy jumped 13% on Thursday after announcing it would double its dividend and increase share buybacks.
For its part, Exxon on Wednesday raised its quarterly dividend, maintaining its status as the dividend aristocrat. On Friday, he announced the resumption of share buybacks from next year; the company plans to buy back up to $ 10 billion over a year or two. That’s still modest by historical levels: At its peak, Exxon used to make around $ 30 billion a year through buybacks.
Exxon’s return to buybacks next year could help narrow its valuation gap against Chevron, which raised its dividend earlier and beat Exxon in a buyout announcement. On average, Chevron has achieved a 12.3% higher forward price / earnings multiple than Exxon over the past six months. In the third quarter, Exxon returned 45% of its free cash flow to shareholders, while Chevron returned 48% in the form of dividends and buybacks.
The immediate cash returns are enticing, but long-term investors will want to pay attention to Exxon’s future spending plans, which the company plans to unveil in December after a meeting with its reconstituted board of directors (including those of the Engine No. 1 activist investor appointed in May). More cash returned to shareholders today means less cash available for spending tomorrow. In Friday’s earnings call, Exxon stuck to its disciplined annual capital spending forecast of $ 20 billion to $ 25 billion and increased its investment target for low-carbon projects, by effectively committing 10% to 12.5% of its annual budget on such projects, which include certain Moonshot technologies. like the capture of hydrogen and carbon. This is a significant increase from the previous range of 2.4% to 3%. It also means that Exxon is prepared to divert substantial sums from oil and gas production, which is a depletion activity. The company has already lagged behind some of its peers in long-term investments in recent years.
More cash today is certainly music to investors’ ears today, especially since oil companies are trading at steep discounts. Those who participate in the longer term will want to listen more closely.
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