It's a tough time for the integrated super-majors like ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX), whose profits were walloped last year due to a horrible climate for downstream activities. Pricing spreads between domestic crude oil and the Brent international benchmark narrowed significantly, which resulted in drastically thinner margins on refined products. On the upstream side, a production dip was marked by field declines and disappointing new project returns.
So now, ExxonMobil and Chevron are eagerly looking forward to the future. Fortunately, the tough refining conditions are easing somewhat as we proceed into 2014. And, their management teams are excited about some major upstream projects that are nearing peak investment, which should add to production. Add it all up, and there are reasons to believe both integrated majors have more profitable days ahead.
Production growth ahead
Chevron's portfolio fell flat in 2013. Total net production of oil equivalents dipped by approximately 0.5%. While disappointing, Chevron held up well relative to ExxonMobil. Exxon's production last year fell 1.5%. In downstream activities, both companies performed extremely poorly. The result last year was that ExxonMobil's and Chevron's earnings-per-share fell 24% and 17%, respectively, in 2013.
However, better days are ahead because both Chevron and ExxonMobil are at a peak investment stage for upstream projects, which will result in lower spending, that should help increase free cash flow. In all, ExxonMobil expects to begin production on a company record, 10 major projects this year, with a combined capacity of approximately 300,000 barrels of oil equivalents per day. That represents 13% growth from the 2.2 million barrels of equivalents produced per day in the fourth quarter.
Chevron's Wheatstone and Gorgon projects together represent the company's major inroads into liquefied natural gas, specifically designed to serve the Asian emerging markets, where demand for natural gas is soaring. The Wheatstone development is a $29 billion undertaking, which includes two LNG trains with a combined capacity of 8.9 million tonnes per annum and a domestic gas plant. First shipments are expected in 2016.
The other major development in Australia is the Gorgon project. The Gorgon project is one of the world's largest natural-gas projects and the largest single resource development in Australia's history. Chevron expects the first shipment of LNG from the Gorgon project in early 2015. In all, Chevron believes it will add as much as 800,000 barrels of oil equivalents in production by 2017.
On the downstream side, ExxonMobil believes the horrible global refining conditions that sunk profits last year are finally abating somewhat. Management stated that a moderate U.S. economic recovery is sustainable, and China's growth rate is stabilizing as well. In addition, in the fourth quarter, the company noticed a widening discount between West Texas and Brent prices.
Going forward, ExxonMobil expects some strengthening in global refining margins. For its part, Chevron sees opportunity in its petrochemicals segment, where it is targeting profitable opportunities in chemicals and lubricants.
Focus on profitability
When you combine their impressive upstream portfolios with the fact that each company will spend less on capital expenditures this year, you can make a case for why their profitability should improve. ExxonMobil plans to reduce capital expenditures from $42.5 billion last year to $39.8 billion this year. Likewise, Chevron has announced a $39.8 billion capital and exploratory investment program for 2014, representing a $2 billion decline from the previous year.
In addition, each company is an effective allocator of capital. ExxonMobil is famous for being an industry leader in this regard. It generated 17% return on capital employed last year, and routinely produces returns on capital in the high teens. As a result, it's reasonable to think that their focus on the most profitable opportunities will pay off.
Both ExxonMobil and Chevron are turning to profitable organic growth from developing and ramping up their existing projects, instead of making aggressive asset acquisitions. Both companies believe last year should be a peak for investment spending and they will finally be able to reap the benefits of those investments. Bringing their existing projects on-line will restore production growth, and improving downstream conditions means this year should be much better than last year.