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Chevron and Conoco Point the Way for Exxon

Bloomberg logoBloomberg 3/24/2020 Liam Denning

(Bloomberg Opinion) -- The critical element when ripping off a Band-Aid is speed. Chevron Corp.’s cut to its spending budget and suspension of buybacks, announced Tuesday morning, hurts of course. Looked at another way, though, it merely acknowledges the injuries inflicted already. It also leaves a certain large rival whose name rhymes with MexxonObil looking like a laggard again, so that probably helps.

No Western oil company’s economics balance at $25-ish a barrel. The market knows this; hence, energy stocks currently vie with the similarly challenged Materials sector for the title of smallest in the S&P 500. Under such circumstances, and with oil demand having dropped into a chasm of pestilence, the prudent thing is to abandon even minimal growth and conserve as much cash as possible without wrecking the business or one’s relationship with investors altogether. Chevron is cutting its capex budget by 20% and, having bought back $1.75 billion of stock in the first quarter, suspending repurchases until further notice.

Cutting guidance isn’t pleasant, but given the drop in the stock already, there’s no need to disburse more cash: Even without the buyback, Chevron yields more today on pure dividend than it did on its analyst day. There’s little point funneling more cash to investors if they aren’t valuing it. A similar situation exists for ConocoPhillips, which trimmed capex and cut, but didn’t suspend, its buyback program last week. That leaves one mega-cap U.S. oil and gas producer that is yet to adjust course.

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Exxon Mobil Corp. had the unfortunate timing of defending its counter-cyclical spending splurge the day before OPEC+ broke up in acrimony and sealed the oil market’s fate. The company has since indicated it is evaluating potentially big cuts to spending, having suffered a credit-rating downgrade from Standard & Poor’s in the meantime. But details are yet to come, and Chevron’s move leaves Exxon looking flat-footed.

Exxon now yields more purely on its dividend, but that indicates higher stress. Forecasts for 2020 are in flux to say the least. Still, using Ebitda as a proxy for cash from operations, current consensus figures imply Chevron needing to borrow a little to cover capex and payouts and Conoco covering from cash flow. Both have strong balance sheets. Exxon, on the other hand, has been borrowing or selling assets to cover dividends for a while. And consensus forecasts indicate cash flow won’t cover capex, let alone the roughly $15 billion dividend payout.

Despite Tuesday morning’s bounce in oil prices, the market still faces the prospect of storage potentially being maxed out within a couple of months or so — which would precipitate a further crash. It is, therefore, perhaps too early to speculate on which oil stocks offer relative safety and gains on the other side of this crisis. Yet Chevron’s and Conoco’s yields, post spending cuts, look relatively robust. Chevron's stock is up 17% as of writing this. Exxon’s yield may be higher, but the Band-Aid hasn’t come off yet.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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