Which Oil Major Has The Best Investment Strategy?

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By Tsvetana Paraskova

Now that the downturn is over, oil majors are eager to show the market that they have adapted to generate more profits and return those profits to shareholders.

Three major oil firms—two from the United States and one from Europe—indicated over the past couple of weeks how they plan to spend some of their cash in order to create more shareholder value. And the paths that ExxonMobil, Hess Corporation, and Total SA have chosen couldn’t have been more different. Of course, the various approaches depend on the company priorities, size, and shareholder base.

According to Bloomberg Gadfly columnist Liam Denning, France’s Total may have made the smartest choice in the near term by spending US$450 million to buy low-cost reserves in Libya. Exxon moved to lift its capital expenditure in an effort to fund an aggressive growth plan through 2025. Hess announced US$1 billion in share buybacks to appease activist shareholders.

Two weeks ago, Total bought the 16.33-percent stake of the Waha oil concessions held by U.S. Marathon Oil Corporation for US$450 million. The acquisition gives Total access to reserves and resources of more than 500 million barrels of oil equivalent, with immediate production of around 50,000 barrels of oil equivalent per day (boed) and a significant exploration potential in the prolific Sirte Basin. Total’s CEO Patrick Pouyanné described this acquisition as “one of the best deals I’ve ever made”, saying that it fits one of his company’s strategic priorities—expanding in the Middle East.

U.S. supermajor Exxon outlined its strategic priorities at its annual analyst meeting last week, saying that it looks to more than double its earnings to US$31 billion by 2025 at today’s oil prices, with an aggressive growth strategy that includes double-digit rates of return in all business segments.

Exxon’s plan was an attempt to ease investor concerns about the underperforming stock price and profit growth in recent months, but investors and analysts focused on two key points in the strategy that diverged from the plans of most of Exxon’s peers. Unlike all the rest of Big Oil, Exxon is raising capex to boost earnings in all segments. Exxon also fell short of announcing a share buyback, as some observers had hoped for.

Exxon’s chairman and CEO Darren Woods said that 2018 capex would be US$24 billion, up from US$23 billion for 2017. Capex in 2019 would jump to US$28 billion, and then to around $30 billion in 2020-25.

On the day following the presentation, when asked about the drop in Exxon stock, Woods told CNBC that analysts were still digesting the fact that Exxon is looking to grow its capex, “moving a little counter to some of our peers out there who are looking to reduce their capital expenditure profile”.

Investors and analysts are not fully convinced that Exxon raising capex is the smartest move at a time when capex discipline is still the ‘new normal’ with Big Oil and investors’ demands.

\But Allen Good, an energy strategist for Morningstar, thinks that “Exxon’s view is that it holds a host of high-return projects that can leverage its superior integrated model and thus warrant investment.”

While long-term production and profit growth have high execution risk, Exxon will be able to cover capex and dividends at $40 per barrel oil, which ensures capex and dividend safety, Good reckons. But buybacks through 2025 will likely be limited because investment, dividend growth, and a strengthening balance sheet will take priority, according to the analyst.

Speaking of buybacks, Hess Corporation’s board authorized last week the purchase of US$1.0 billion of Hess common stock by the end of 2018, adding to the US$500 million share buyback program it announced at the end of last year.

In Hess’s case, the buyback is seen as more of an attempt to appease activist shareholder Elliott Management Corporation, which has reportedly renewed an attempt to overhaul the oil company five years after it first expressed dissatisfaction with the management and stock performance. In December 2017, The Wall Street Journal, citing people familiar with the matter, reported that Elliott—which holds 6.7 percent in Hess—is renewing its calls for changes, including for Hess to favor buybacks over dividends.

“We are encouraged that the company has indicated that they are committed to closing the value gap and will be dynamic in exploring further steps to do so before first oil in Guyana,” Elliott said after Hess announced the latest buyback, adding that it “supports changes at Hess.” Offshore Guyana, Hess and Exxon are partners in a very prolific basin, and have announced seven oil discoveries in the past three years. Guyana is a core area for upstream growth for both Exxon and Hess, with first production at one of the first discovered fields expected by 2020. The two U.S. firms are also boosting domestic shale operations, with Hess growing in the Bakken and Exxon betting big on the Permian.

France’s Total, on the other hand, is not investing in the Permian, because it doesn’t have access to acreage there and because it has different priorities, such as the Middle East, the North Sea, and deepwater.

But all three companies are trying to woo investors again, and are looking to spend their cash in such a way as to both please shareholders and play to their strengths.

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