The oil and gas sector’s chastity is being put to the test. America’s largest oil companies Exxon Mobil and Chevron slashed capital expenditures last year, and they weren’t alone. But with oil prices reaching around $90 a barrel, their highest since 2014, starting new projects will be tempting. Reformed spending sinners will find it hard to resist the urge to over splurge just as shareholders want cash back.
For the U.S.-based oil companies, shale drilling, which uses high pressure water and sand to blast oil out of stone, is both the biggest temptation and threat. Exxon and Chevron made huge bets in the Permian basin, known for this type of drilling, several years ago. But it hasn’t been a great for them or their peers. Over a decade, shale drilling burned $300 billion in cash, and impairments were $450 billion, according to a 2020 report by Deloitte.
Slashed investment and high oil prices mean cash is now flowing. Chevron reported $21 billion of free cash flow for last year on Friday, a quarter higher than any previous year, while spending a sliver of its 2014 outlay. Exxon’s cash flow from operations tripled in 2021 to $48 billion, while investment was far lower than originally expected.
The question is now what to do with that cash. The oil market looks like it could use some more pumping. Drilled but uncompleted wells fell from about 7,300 at the end of 2020 to about 4,600 according to the U.S. Energy Information Administration. That’s the lowest it has been since 2014. Only just recently have firms started rolling up their sleeves.
The trouble is that neither Exxon nor Chevron have proven their cash spending has been worth it overall. Exxon’s return on invested capital hasn’t been in the double digits for years, and in 2020 it was negative. Chevron isn’t much better.
While these oil companies are great at shelling out cash, they haven’t been quite as good at making it worth their investors’ while. Past experience suggests that executives might want to hang to their newfound religion. Repurchasing more stock and paying chunky dividends is less exciting, but it may be something shareholders finally welcome.
Robert Cyran is a Reuters Breakingviews columnist. The opinions expressed are his own.