Exxon and Chevron Navigate Oil Price Drop as Investor Returns Face Potential Strain

As oil prices slump and market surpluses grow, Exxon and Chevron’s latest earnings show resilience yet reveal pressures on future investor returns. Both oil giants are navigating a drop in profits while affirming dividend commitments and buyback plans, drawing on substantial cash reserves to weather the downturn.

Exxon and Chevron Beat Earnings Forecasts Despite Profit Declines Amid Slumping Oil Prices

As reduced prices test the durability of America's largest oil firms and promise to pour wealth on investors, the cork-popping years may end.

According to the Wall Street Journal, as energy prices plummeted and fuel-making margins contracted, Exxon Mobil and Chevron reported lower third-quarter profits on November 1. Although there are growing indications that an oil glut will keep prices low for months, the corporations expressed confidence that their cost-cutting and spending reductions since the pandemic had prepared them for the worst.

Exxon reported a third-quarter profit of $8.6 billion on November 1, 5% less than last year. According to FactSet, its $1.92 earnings per share beat analysts' projections. Chevron's reported profit was around $4.5 billion compared to the same quarter the previous year, a 31% decrease. Its $2.48 earnings per share are also above forecasts.

The two U.S. oil majors have made more money and given investors more than $155 billion in dividends and share repurchases since the conflict in Ukraine sent prices skyrocketing in early 2022.

However, there is currently more than enough oil in the world. Due to increased supply, oil prices have dropped by almost 15% in the last six months, and Middle Eastern producers are considering bringing back 2.2 million barrels per day from the sidelines in the coming year.

Earlier this week, oil prices were just a few dollars over a three-year low. According to analysts, some U.S. companies would have to choose between funding their large repurchase programs with debt or slowing them down. BP announced on October 29 that it would reevaluate its plans for a 2025 repurchase. By the end of October 31, the stock had dropped 5.4%.

Exxon stated that the $20 billion in buybacks it committed to providing to investors each year could be covered by its $27 billion in cash on hand. With roughly $4.7 billion in cash on hand, Chevron stated that it also intends to safeguard shareholder dividends. It is anticipated that several smaller shale companies may reduce dividends and buybacks.

Chevron and Exxon Brace for Market Volatility, Citing Strong Cash Flow and Cost Efficiency

According to Mike Wirth, CEO of Chevron, markets may experience more downward pressure if OPEC and its allies reverse the production curbs that have supported prices. Global geopolitical disputes, however, have the potential to "switch it the other way."

“The market looks like it’s going to be well-supplied,” Wirth said in an interview. “We’re prepared to compete in any price environment and a downcycle would not be a surprise.”

He said he expects several billion dollars worth of asset sales to close in the fourth quarter. Chevron’s cash flow, he said, will cover its dividend and capital investments and “contribute to, if not cover,” its buyback program, which remains unchanged.

Exxon Chief Executive Darren Woods pointed to the company’s $11.3 billion in cost cuts since 2019 and said the oil barrels it produces are twice as profitable as they were in 2019.

After the oil giants banked historically high annual profits in 2022, they spent record amounts on buybacks and dividends the following year, among the highest among U.S. companies. Now, their place among America’s most prosperous companies is threatened.

Energy markets’ woes are multifaceted. China’s demand for crude—a global growth engine—has slackened, with its factory activity shrinking for five consecutive months. A manufacturing report on October 31 indicated that China’s fiscal stimulus is working. Still, analysts warned that the country’s oil demand could weaken further if former President Donald Trump wins a second term and implements tariffs on its exports.

Record U.S. Crude Production Pressures Oil Prices as OPEC Signals Potential Market Glut

Meanwhile, the U.S. pumped a record amount of crude in August, at about 13.4 million barrels a day, and oil production has climbed in Canada, Brazil, and Guyana. The Organization of the Petroleum Exporting Countries is also poised to put more oil onto the market, having already delayed planned increases to output because of falling prices.

WSJ reported that Saudi Arabia’s oil minister recently said prices could fall as low as $50 a barrel if OPEC countries keep pumping more oil than their quotas allow. Analysts said the remarks hint Saudi Arabia may soon relent in its efforts to support prices. “This could get ugly,” said Robert Yawger, an analyst at Mizuho.

Compared to 2020, when the pandemic caused an unprecedented decline in demand and prices momentarily went negative, U.S. shale companies now seem better equipped to handle the consequences of a slump. The majority complied with the investors' advice to reduce spending, settle debts, and return any available funds. With large budgets and various assets, Exxon and Chevron are more appropriate than most.

“We feel very good about the position we’re in,” said Kathy Mikells, Exxon’s finance chief, noting the company’s net debt to capital ratio is 5%.

Lower prices are anticipated to reduce the number of wells that can break even at such levels, however, as U.S. producers have dug through some of their most valuable shale acreage.

Many U.S. oil companies can reduce dividends and share buybacks, but some investors would sell shares if they do, according to Wil VanLoh, CEO of Quantum Capital. "That will be the point of contention between the management teams and investors," VanLoh stated.

However, he noted that many investors are aware that oil producers may face higher prices in the long run because businesses are replacing exhausted stocks at the slowest rate in decades, which might eventually lead to a shortage of new supply. "I do believe that investors recognize that oil and gas companies are facing a very long-term secular wind.