Big Oil Is Spending More, Producing Less

Big oil companies have seen a decline in production in recent years even as they have ramped up capital spending.

Feb 6, 2014 at 12:47PM

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!


Varun Chandan Arora has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information