What did Exxon and Chevron’s Q1 earnings tell the market?
The earnings for Exxon (XOM) and Chevron (CVX) were yet another verification of what the future holds for investors and their portfolios. The stage for the market turmoil we are facing on the markets today started years ago when the world started printing money for flawed energy policies.
“Make no mistakes, this is a worldwide financial reset we are facing, and the energy crisis that was started years ago just exacerbated the entire market reset.” - Jay R. Young
This week will be yet more validation that the market reset is happening, and we are not sure where the bottom will be.
At a glance the chart shows us that the base line for this market reset we are undertaking will be a critical inflection point for wealth creation or destruction.
Now that the overall picture is set, lets drill down to what the earnings for Q1 from Exxon and Chevron tell us about the oil and gas markets.
Chevron, the second-biggest U.S. oil company reported earnings per share of $3.23. Analysts expected an EPS of $3.41, according to FactSet. However, it beat estimates for overall sales, generating $54 billion against expectations of $51 billion.
Chevron’s sales came in higher than expectation– but shares are flat -why? The biggest reason was over a 50% increase in drilling costs. The drilling costs for all E&P companies is making the tight CapEx budgets tight but are even making it worse. This ultimately will limit the drilling and keep increases in the production limited. While the U.S. gained 10% in production, the world had an overall drop of 4% effectively negating any increased production counting for pricing on supply and demand.
Looking at Exxon we see that they also beat revenue but missed earnings per share. They also cited the supply chain increased drilling costs but announced a $30 billion stock buyback. This is a great sign for investors as the Exxon executives believe in their projections for continued high oil prices and profits. The stock buyback helped overshadow the $4.3 billion hit related to its Sakhalin-1 operation in Russia.
This week is also bringing focus on the inability of OPEC and OPEC + to increase production through desire, or capabilities.
And this morning Oilprice.com published: “U.S. Gulf of Mexico to See Burst of New Activity. The upcoming months will see the commissioning of BP’s (NYSE:BP) Argos and Shell’s (NYSE:SHEL) Vito floating production rigs, coming on the back of Murphy Oil’s recently started King Quay rig, adding some 280,000 b/d of new output capacity. “
The Bottom Line
Both announced modest increases to their drilling programs, and the impact for the modest increases will effectively have a negative impact on increasing drilling production. This is due to the ever-increasing drilling costs. If your costs go up 50% across an entire industry, does that mean your inflation rate for the industry cost of goods sold is also 50%? So, doing some math, if you are increasing your CapEx budgets 10%, doesn’t it look like 40% more capital is required just to keep production moving forward?
While this looks like an over simplified way to look at this complicated market structure, but if the oil and gas companies worldwide are not willing to increase their drilling programs more than the effective inflation rate, would mean even demand destruction could not lower oil prices.
I am applauding the management of Exxon and Chevron for keeping their governance portion of ESG commitments to their stakeholders. It is very commendable that they are managing their companies’ resources to maximize shareholder returns. This does however come at a cost to the consumers with higher prices for everything that involves transportation or manufacturing. Just adding to the inflation treadmill that we have jumped on.
On the world oil supply side, the production issues will support higher prices, even with a significant demand destruction due to inflation. And the additional 250,000 b/d of new output capacity will not make up for the international communities lack of increasing outputs.
Investors will have the opportunity to diversify their portfolio into Alternative Investments that are based upon commodities and have assets owned in the funds.
As always check with your CPA if alternative investments are good for your portfolio
Please reach out to our team at any time for answers to your questions.
Jay R. Young, CEO, King Operating
ForbesBooks Author of “The Upside of Investing in Oil and Gas"