Exxon Mobil Corp. and Chevron Corp. concluded the earnings season for major oil companies by reporting significant increases in fossil fuel production. This development occurs as OPEC and its allies plan to enhance the global crude supply.
The boost in production for these U.S. oil companies stemmed from record extraction levels in the Permian Basin, which consistently delivers year-over-year growth and efficiency improvements. Exxon reported a 24% increase in oil and gas production, augmented by its $60 billion acquisition of Pioneer Natural Resources Co., while Chevron saw a 7% rise in output.
These American companies are not alone in expanding production. Shell Plc and BP Plc also recorded increases of 4% and 2% respectively, despite having more ambitious net-zero targets than their U.S. competitors.
The overall increase in production contributes to a dimming outlook for oil prices, which have fallen approximately 12% over the past six months due to weak demand from China, the world’s largest crude importer. Prices may decline further if OPEC reinstates previously reduced production levels.
This situation is notably different from a few years ago when companies were cutting capital expenditure in response to the pandemic and pressures from the environmental, social, and governance movement to invest in lower-carbon alternatives. Industry success in cost efficiency and a shift in strategy towards affordable oil and gas has been central to their current approach.
Nick Hummel, an analyst at Edward D. Jones & Co., commented that Exxon and Chevron continue to adhere to their oil and gas strategies while expanding their assets. He indicated a soft near-term outlook for oil and gas, particularly with additional supply potentially being introduced by OPEC.
Exxon’s strategic adjustments, following an activist challenge from ESG-focused Engine No. 1 in 2021, include acquisitions, divestments, cost reductions, and efficiency improvements. These efforts have reportedly doubled the company’s profit margins per barrel since 2019, according to Chief Financial Officer Kathy Mikells.
Chevron, having increased its oil and gas production by 27% over the past decade while halving capital expenses, attributes its production growth to successful investments in Australian gas projects and efficiency gains. The company has doubled its Permian Basin output in five years, enhancing shareholder returns.
The surge in U.S. production, which is currently about 50% more than Saudi Arabia’s output, is preventing millions of OPEC barrels from entering the market. Combined with new supplies from nations like Guyana and Brazil, it is projected that by 2025, an additional 5 million barrels a day of productive capacity will be available, as per analysts at Macquarie. This is set against a backdrop of subdued demand growth, suggesting the potential for Brent crude prices to fall below $70 a barrel, absent major geopolitical disruptions.
Dropping prices could affect the ability of major oil companies to maintain dividends and share buybacks. BP’s stock recently dipped after indicating a possible reduction in its buyback program next year in response to declining oil prices. Nevertheless, Exxon, Chevron, and Shell express confidence in their ability to navigate these challenges. Exxon believes its projects in Guyana and the Permian, which contribute about a quarter of its production, are profitable at crude prices below $35 a barrel, providing resilience in a softening market environment, according to Mikells.
