Big Oil Is Spending More, Producing Less

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Last week saw oil and gas giants ExxonMobil (NYSE: XOM  ) and Chevron (NYSE: CVX  ) release their quarterly and full-year results. Both companies saw a drop in profit for the fourth quarter due to weaker refining margins and lower production. The drop in production comes at a time when the U.S. is seeing record oil and gas output thanks to the shale boom. Additionally, both Exxon and Chevron have been spending heavily over the past few years; still, their output has been falling.

Rising capital expenditure
Exxon and Chevron, along with other major Western oil companies, have seen a significant increase in capital expenditures over the past few years. The table below shows the substantial increase in capital expenditure at Exxon and Chevron between 2010 and 2013.







$32.22 billion

$36.76 billion

$39.80 billion

$42.50 billion


$21.75 billion

$29.06 billion

$34.23 billion

$41.90 billion

Europe's Royal Dutch Shell (NYSE: RDS-A  ) saw its capital expenditure rise to $44.3 billion in 2013. This even as the company's cash flow from operating activities slipped from $42.7 billion in 2012 to $37.5 billion in 2013.

Rising capital expenditure is not such a bad thing in itself as it means that companies are investing in growth opportunities. However, for big oil companies the increase in capital spending has not yet been accompanied by an increase in output as the table below shows. Both Exxon and Chevron have seen a drop in their total net oil-equivalent production in recent years.






4.5 mboed

4.24 mboed

4.18 mboed


2.67 mboed

2.61 mboed

2.60 mboed

Mboed: Million barrels of oil equivalent per day

The key question is why big oil companies are spending more but producing less oil. This is because rising oil demand, coupled with depleting conventional resources, has meant that oil companies have been forced to take on more complex projects, which require substantial initial investment. The investment would be justified if oil prices were rising, however, to add to oil companies' woes, prices have been flat in the past year.

Rising debt
Higher capital expenditure has also resulted in big oil companies taking on more debt. Both Exxon and Chevron have not been generating sufficient cash from operations to cover their rising capital expenditures and shareholder distributions. As a result, both companies saw a substantial increase in their debt levels at the end of 2013. Exxon had $22.7 billion in debt on its balance sheet at the end of 2013, nearly double the amount of debt at the end of 2012. Meanwhile, the company's cash balance slipped to $4.9 billion at the end of 2013 from $9.9 billion at the end of 2012.

Chevron also saw a sharp increase in its total debt and a decline in its cash reserves at the end of 2013. 

While the situation at Exxon and Chevron is not alarming, it does raise some concerns over both companies' ability to continue paying out shareholders.

What to watch going forward
Both Exxon and Chevron have not given any indication that they plan to lower payouts to shareholders. However, there is no doubt that both companies' balance sheets are being stretched due to higher capital expenditure and shareholder distributions. Therefore, it is important that both Chevron and Exxon reduce spending in the coming years. There are already signs that capital spending at big oil companies may have peaked. Speaking at a conference call following the release of fourth-quarter results, John Watson, Chairman and CEO of Chevron, said that he expects 2013 to be a relative peak spending year, and 2014 to represent the peak year for LNG spending as the company's two Australian LNG projects move closer to production.

If indeed capital spending has peaked and we start seeing a slowdown in the coming years, this would be a positive for shareholders. In fact, this would be one of the main things I would watch in the next two to three years. Another thing to watch moving forward will be production. While production has been falling at both Exxon and Chevron, both companies are expecting an increase as large new projects come on board. If there is an increase in output going forward, the increase in capital spending in recent years would be justified. Apart from these, the outlook for big oil companies would of course depend on oil demand and prices. Despite recent worries over a slowdown in China, oil demand and prices should remain robust in the long term. 

Bad news for OPEC could be good news for investors
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!


Read/Post Comments (1) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 06, 2014, at 1:35 PM, drpearso wrote:

    Increased capital expenditures is not just an issue with major O&G companies. It is the same with smaller and mid-size O&G companies. The cost to find and produce new unconventional oil and gas is much higher than old conventional resources. Some of the biggest costs for major O&G companies is due to building LNG transportation facilities.

    This large capital spending for LNG project is the beginning of how natural gas will take over oil as the primary energy source in the future. If gas prices domestically were inline with other countries you would see an increase in BOE production from the majors. The majors are holding back known gas production due to the low price of natural gas.

    The small unconventional oil companies are increasing oil production each year but they are burdened by debt due to the high cost to find and produce the new expensive tight oil. The story here is the older major companies are spending down their cash for major projects while the smaller companies are trying to drill and produce their way out of heavy debt. Regards.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2827019, ~/Articles/ArticleHandler.aspx, 8/30/2015 4:11:43 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Varun Chandan

I have a Master in Finance degree from IE Business School in Madrid. I use the top-down approach when it comes to investing. I like to analyze macroeconomic factors and how they impact individual companies.

Today's Market

updated 1 day ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:01 PM
CVX $80.43 Up +2.79 +3.59%
Chevron CAPS Rating: ****
RDS-A $52.60 Up +0.66 +1.27%
Royal Dutch Shell… CAPS Rating: ****
XOM $75.07 Up +0.22 +0.29%
ExxonMobil Corp CAPS Rating: ****