February 7, 2023

Oil majors confirmed their production growth will be slower this year

As the first of the oil majors publish their annual results 2022, we take the opportunity to extract the key takeaways from these releases.

After a very strong start to 2022 within both the up and downstream segments of the market, it is no surprise that earnings came in at historical record highs finishing at nearly double the levels realized through 2021. Higher prices, refining margins, and trading returns all supported strong growth in 2022. ExxonMobil set the record for an oil company with net income of $55.7bn compared to $23bn in 2021. Chevron followed a similar path, with earnings managing $36.5bn, up from $15.6bn. In Europe, Shell saw it profits up 110% from $19bn to $39.9bn. For Shell, the focus has been on natural gas and LNG to replace lost volumes from Russia. This was also the case for Conoco with its Sabine and Corpus Christi export operations.

Strong earnings growth did not translate to elevated production growth. Exxon, for example, saw its 2022 production flat, at 3.73 Mbd, with the fourth quarter at 3.82 Mbd, in line with the last quarter of 2021. This comes despite its involvements in growing areas like Guyana and the Permian Basin. The company reached a quarterly record in the Permian Basin at 0.56 Mbd, up from nearly 0.1 Mbd and aims to reach 1 Mbd in 2027. Guyana’s production grew by about 70 kbd with Liza Phase 2 starting up ahead of schedule and both Liza Phase 1 and 2 producing above the investment basis. For 2023, there is little more to expect. The group anticipates its capital and exploration expenses to be in the range of $23bn to $25bn, compared to $22.7bn last year. Regarding the upstream investment, this will be deployed in the next development in Guyana, and in increased spending in US unconventional with the aim to increase production with high returns.

Exxon, as the biggest oil major, is not an exception. Royal Dutch Shell has significantly decreased it production over the few last years through divestment and lower expenditure, while focusing on high margin barrels. As mentioned by management last week “in 2022, at a similar Brent price, with 7% less production than we had in 2014, yet we're able to deliver some +80% free cash flow and +70% earnings. And therefore, the quality of the upstream has significantly improved because of this focus on value over volume”. The company left its capital spending guidance unchanged at $23-27bn for 2023, saying it plans to "remain disciplined while delivering compelling shareholder returns with production expected to be approximately 1.75 Mbd to 1.95 Mbd.” Conoco also announced its net capital spending seen in 2023 is only set to stabilise production.

Given the ever-reinforcing focus on capital discipline, via share buy-backs and aggressive dividends, there is little hope oil majors will manage to increase production in 2023, with the only exception being areas of high potential, where capital outlays will enjoy sizeable positive margins. Like other oil majors, Shell mainly used its record high cash flow to lower its debt and increase shareholder pay-out. The firm now enjoys the lowest outright debt burden seen since 2014 and intends to continue focusing on share buy-backs (an additional $4bn in the coming months) and dividend increases ( +15%). Shell distributed $26bn to shareholders in 2022, of which $18bn was in share buy-backs.

Despite the torrent of positive earnings news, momentum is poised to slow into 2023. Q4 22 was already the lowest period for earnings over the last three quarters, albeit gains were still in a range of 25 – 50% y/y. Consensus forecasts estimate earnings will decline relative to 2022, especially as Q1 already looks set to come in under Q4 22 on the back of lower energy prices. Lower prices are also likely to weigh production growth and plans for capital expenditures.

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