Why Oil Companies Are Lush With Cash but Not Spending Much

In this segment of "The High Energy Show" on Motley Fool Live, recorded on Feb. 1, Fool contributors Travis Hoium, Jason Hall, and John Bromels examine why some of the big oil companies have chosen to take a more measured approach toward capital spending in recent years.

Travis Hoium: The topic that I want to bring up is, oil prices are very high, oil profits are very high. ExxonMobil (XOM -2.78%) reported this morning $45 billion in cash flow this year. They paid down $20 billion in debt. You would think in that environment that companies would be eager to spend money to produce more oil and increase revenue but they're not. In fact, they're going the opposite direction.

This is the latest data that I could get for their plans for 2022. Their capital spending budget, it's for 2022 and I compare that to 2018 when oil at least at the first of the year was $56.71 per barrel, 2020 at the first of the year. These are pre-pandemic numbers, so a lot of these numbers came way down, remember when oil suddenly went negative for a few days there, so this actual spend in 2022 was significantly lower but their planned spend was pretty high.

ExxonMobil planning to spend less this year, I think that number is actually $21-$24 billion now. Planning to spend less this year than 2018 or 2020, despite the fact that oil prices are 30% higher. Chevron's (CVX 0.37%) same story, Shell (SHEL) maybe will spend a little bit more. What's going on here, guys? I mean, what's the thought process with these oil companies choosing to spend less money despite the fact that they are very cash-rich right now. Got a ton of money coming in and oil prices are high and look to be remaining high for the foreseeable future anyways.

Jason Hall: I'll jump in here first. I think a lot of people look back over the past year-and-a-half and assume that that's the reason that this is happening. You showed that chart with oil prices and you look at the COVID lockdowns in March of 2020. Basically, the end of the first quarter and the first two months of the second quarter of 2020, global transportation screeched to a halt. Industrial activity fell to like 10-year, 20-year low levels, and global oil consumption fell off like 30 million barrels a day.

I mean, it dropped suddenly like within weeks, and the bottom line is that the global oil supply chain is like a locomotive. It's like a locomotive going 100 miles an hour, that's five miles long. You don't just hit the brakes and stop the whole thing. If you do, a lot of stuff breaks. The industry shut off the taps as much as they could and stuff did break. Particularly, you think about a lot of wells when you shut-in production, it's not just turning off the faucet in your backyard at the winter and then the spring, you turn it back on, the water comes out.

There's all kinds of maintenance and capital investments that have to be made and remediation that have to be done to bring the production backup. That did happen, but that's not actually what put us in this situation. What really put us in this situation is everything that happens from, can you guys see the chart here, Brent and West Texas crude chart?

Travis Hoium: Yes.

Jason Hall: I'm actually going to take us back to like 2012, right? It's basically everything that happened from the beginning of 2015 through now is really what happened. These were the drill baby drill years, and there was tons of money that was being spent to develop resources, the technology.

Travis Hoium: Offshore drilling, shale, deep-water, shallow-water basically everywhere, all around.

Jason Hall: Exactly.

John Bromels: Yes.

Jason Hall: Yes. There was lots of money that was flowing into developing resources because the idea was, Brent Crude, which is the most important global benchmark for oil was $114, $115 a barrel for most of that period between 2010 through mid-2014, and then, guess what happened? There was some saber-rattling happening in the Middle East between Russia and Saudi Arabia. The U.S. was pouring oil into the market because of fracking and advancing that technology, U.S. production shot up. Saudi Arabia and OPEC said, "We're not going to stabilize the market anymore." They went after market share and left prices absolutely crumbled.

Travis Hoium: By the way, they were trying to crush some of these shale operators who fundamentally have higher production costs than you have in the Middle East.

Jason Hall: Exactly. Because here's the key part about it is you think about these traditional oil and gas, is it's basically a hole in the ground that's full of oil and you stick a pipe in it and oil comes out. Shale, they call it tight formations and it's basically you're getting oil out of rock, so you have to fracture the rock, you have to do things to make those fractures stay open, and then you extract the oil, and then you have to do it again [laughs] in three years. They don't produce for 50 years or 100 years like you think about some of those oilfields in Texas that have been producing for 60 years, 70 years.

You don't get that same production from the title oil. You're constantly throwing a new capex into it to do that, and that's where the industry is focused in North America is throwing its money into that kind of capex and hasn't been investing for the past five or six years. The things Travis, you were talking about before, those offshore, the ultra-deepwater, all of those big, where we know the big reserves are because it takes five or 10 years or longer to develop them, and you might spend $10-$15 billion [laughs] dollars or more to develop onto those projects. Everybody's focused on the quick return stuff to get cash flow, consistent, steady cash flow.