Image Shown: Shares of Chevron Corporation (blue line) and ExxonMobil Corporation (orange line) are both up sharply year-to-date as of this writing.
By Callum Turcan
Two of our favorite energy companies, Chevron Corporation (CVX) and ExxonMobil Corporation (XOM), recently reported their third quarter 2021 earnings reports. We include Chevron and ExxonMobil as ideas in both the Best Ideas Newsletter and Dividend Growth Newsletter portfolios given their ample capital appreciation upside and promising dividend growth trajectories. The top end of our fair value estimate range for Chevron and ExxonMobil stands at $144 per share and $110 per share, respectively, well above where each company’s shares are trading as of this writing. Shares of CVX yield ~4.7% and shares of XOM yield ~5.4% as of this writing.
Overview
Surging raw energy resources pricing (particularly for crude oil and natural gas) of late supports the outlook for the upstream operations of these energy giants (Chevron and ExxonMobil), the part of their businesses focused on extracting oil & gas from the ground. Please note that upstream operations tend to be the cash flow cows of firms like Chevron and ExxonMobil. Rising raw energy resources pricing is partially due to the easing of lockdown measures enacted to tame the coronavirus (‘COVID-19’) pandemic seen worldwide (which is boosting demand for gasoline and diesel), partially a result of subdued investment in upstream oil & gas operations seen over the past several years, and partially due to actions by the OPEC+ oil cartel to keep a lid on global oil supplies to prop up prices.
Back when oil prices began to tank in late 2014 (a pricing bust that lasted through 2017), that led to upstream capital investment moving sharply lower during the second half of the 2010s decade versus the first half. Additionally, when raw energy resources prices tanked in 2020, upstream capital investment once again was curtailed. Though raw energy resources pricing has improved considerably this year, large Western energy firms are not putting their foot on the gas pedal as it concerns ramping up their upstream capital investments. Instead, most Western energy firms are focused on taking advantage of the favorable environment to return cash to shareholders, highlighting why we are big fans of the space, particularly Chevron and ExxonMobil.
As noted previously, the easing of pandemic-related lockdown measures seen in recent months across the globe is supporting the outlook for refined petroleum product demand (such as gasoline, diesel, and kerosene), which is turn supports the outlook for downstream operations (namely refineries). Running refineries at “normalized” utilization rates results in much stronger margins before taking crack spreads (refining margins) into account. Strong demand for physical goods remains rather strong, supporting the outlook for petrochemical operations (which produce plastics, lubricants, detergents, adhesives, and various other products). Similar to refineries, petrochemical plants produce much stronger margins running at “normalized” utilization rates. Please note that refineries and petrochemical plants faced subdued utilization rates last year in many instances due to the pandemic.
These aforementioned favorable dynamics have gone a long way to bolstering the financial performance of both Chevron and ExxonMobil, with room for upside going forward.
Chevron
On October 29, Chevron reported third-quarter 2021 earnings that beat both consensus top- and bottom-line estimates with strength seen at both its ‘Upstream’ and ‘Downstream’ business operating segments. Recovering raw energy resources pricing supported its Upstream unit’s financial performance while the ability to run its refineries and petrochemical plants closer to “normalized” utilization levels supported the financial performance at its Downstream unit. Additionally, past cost structure improvements went a long way in supporting the company’s financial performance. Chevron is steadily recovering from the worst of the COVID-19 pandemic.
Chevron generated $6.7 billion in free cash flow during the third quarter of 2021 while spending $2.6 billion covering its dividend obligations and $0.6 billion on a net basis buying back its stock, according to its latest earnings press release. When Chevron reported its second-quarter 2021 earnings report, the firm announced it was resuming share buybacks to the tune of $2.0-$3.0 billion per year.
During Chevron’s latest earnings call, management noted that the firm was “lowering our full-year C&E [capital and exploratory] guidance to $12 billion to $13 billion, primarily due to COVID-related project spend deferrals into next year, lower non-op CapEx in the Permian, and continued capital efficiencies.” Management also had this to say during the earnings call (emphasis added):
“Strong operating cash flow enabled us to deliver on our financial priorities, including the resumption of share repurchases. Compared to before COVID, operating costs are down, upstream production is up, and we’re much more capital efficient. Cost efficiency and capital efficiency are essential to navigate commodity price cycles.
Providing resilience through the low periods and leveraging upside when markets are strong. This has been evident over the past several quarters, and especially so in the most recent one, as we generated company record free cash flow higher than the strongest quarters in 2008 and 2011 when oil prices were well over $100 a barrel.” — Pierre Breber, VP and CFO of Chevron
We appreciate Chevron’s impressive free cash flow generating abilities in the current environment. As raw energy resources pricing and demand for refined petroleum products has continued to improve since the third quarter, we view Chevron’s near-term outlook quite favorably. We also expect Chevron will outperform over the long haul as well, aided by recent improvements in its balance sheet strength.
According to an abbreviated balance sheet statement included in its latest earnings press release, from the end of December 2020 to the end of September 2021, Chevron reduced its total debt load by $7.0 billion to $37.3 billion while growing its cash, cash equivalents, and marketable securities position by $0.4 billion to $6.0 billion during this period. Chevron is making the right call by taking advantage of its improving financial position and outlook to cut down on both its total and net debt load.
In our September 2021 article Chevron Investing in Biofuels and Hydrogen (link here), we highlighted the various green energy indicatives Chevron has embarked on. During its latest earnings call, management noted that Chevron “sold the first sustainable aviation fuel produced from our El Segundo Refinery [in California]” to Delta Air Lines Inc (DAL) at the Los Angeles International Airport (‘LAX’). On September 14, Chevron announced its commitment to spend $10.0 billion on capital investments towards its green energy business through 2028, which was triple its previous guidance.
ExxonMobil
On October 29, ExxonMobil reported third quarter 2021 earnings that beat both consensus top- and bottom-line estimates. ExxonMobil reported strength across the board with all three of its core business operating segments (‘Upstream,’ ‘Downstream,’ and ‘Chemicals’) reporting sharp improvements on a year-over-year basis during the third quarter of this year. We appreciate the robust rebound ExxonMobil is experiencing from the worst of the COVID-19 pandemic.
The company’s Upstream and Downstream units posted solid improvements in their earnings on a sequential basis as well. Improving realizations for raw energy resources at its Upstream unit and improving margins at its Downstream unit due to higher utilization rates and stronger refining margins last quarter was key. Earnings at its Chemicals unit was down modestly sequentially last quarter due to increased turnaround activity at its domestic operations and lower margins at its international operations.
ExxonMobil has been a major beneficiary of its past restructuring efforts, particularly as it concerns improving its cost structure. This has put the company in a great position to capitalize on the recovering global energy complex. From its earnings press release (emphasis added):
In addition to reducing structural costs by $3 billion in 2020, the company has captured $1.5 billion in additional structural savings through the first three quarters of 2021. The company is on pace to exceed total structural cost reductions of $6 billion annually by 2023 compared to 2019 levels, with efforts continuing to identify further structural savings by leveraging the corporation’s global scale and integration.
The company plans to spend $16.0-$19.0 billion on its capital expenditures in 2021, down sharply from levels seen during most of the 2010s decade. Going forward, ExxonMobil is targeting $20.0-$25.0 billion in annual capital expenditures. ExxonMobil is stepping up its green energy investments in the wake of pressure from activist investors, particularly Engine No. 1 which recently won three seats on ExxonMobil’s board of directors. Here is what its latest earnings press release had to say:
ExxonMobil plans to grow investments that lower emissions, leveraging the company’s technology, scale, integration, and global footprint. Cumulative low-carbon investments are anticipated to be approximately $15 billion from 2022 through 2027. The company is also on track to achieve its 2025 emissions intensity reduction plans by the end of 2021, and expects to announce accelerated Scope 1 and Scope 2 reduction plans later this year.
Please note that ExxonMobil’s current green energy investment targets are up sharply from its previous goals, highlighting a major turnaround in its position towards the issue.
According to ExxonMobil’s earnings press release, the firm generated $7.6 billion in free cash flow during the third quarter of 2021 and according to its latest earnings presentation, ExxonMobil generated $5.2 billion in “excess” free cash flow after covering its dividend obligations last quarter. Recently, ExxonMobil boosted its quarterly dividend by a penny, bringing its payout up to $0.88 per share or $3.52 per share on an annualized basis. The company’s free cash flow generating abilities should continue to improve alongside improvements in its cost structure.
In conjunction with its latest earnings update, ExxonMobil announced a $10.0 billion share buyback program that would start in 2022 and last for 12-24 months. The company noted that during the first three quarters of 2021, it had reduced its gross debt load by ~$11 billion including a ~$4 billion reduction last quarter. Now that ExxonMobil’s financial position is steadily improving, the company feels confident it can begin returning large sums of cash to its shareholders while improving its balance sheet strength.
Concluding Thoughts
We liked what we saw in the latest earnings reports from Chevron and ExxonMobil. Both are focused on fiscal discipline and returning cash to shareholders in the form of dividend payments and share repurchases. Looking ahead, the outlook for the global energy complex is quite bright, and we continue to be huge fans of both Chevron and ExxonMobil. Please note we also include Energy Select Sector SPDR Fund ETF (XLE) as an idea in the Best Ideas Newsletter portfolio to gain diversified exposure to the recovering global energy complex.
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Oil and Gas Complex Industry – BKR, HAL, SLB, BP, CVX, COP, XOM, RDS, TOT, COG, EOG, OXY, PXD, ENB, ET, EPD, MMP, KMI, PSX
Related: DAL, BNO, PBR, RDS.A, RDS.B, USO, XLE, XOP
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Callum Turcan does not own shares in any of the securities mentioned above. Energy Select Sector SPDR Fund ETF (XLE) is included in Valuentum’s simulated Best Ideas Newsletter portfolio. Chevron Corporation (CVX) and ExxonMobil Corporation (XOM) are both included in Valuentum’s simulated Best Ideas Newsletter portfolio and simulated Dividend Growth Newsletter portfolio. Enterprise Products Partners L.P. (EPD) and Magellan Midstream Partners L.P. (MMP) are both included in Valuentum’s simulated High Yield Dividend Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.