But the other critical element is spending and, in particular, keeping a lid on it while still growing output. On that front, third-quarter earnings were much better than the previous set, which were replete with budget increases but not much to show for them.
So with the numbers in, guidance updated, and forecasts recalibrated, the chart below looks at how the biggest oil and gas producers in North America are performing on two important metrics: free cash flow yield and production growth. Using the Bloomberg Terminal, I screened integrated and E&P companies based in North America with a market cap of $10 billion or more, with 21 making the cut:
At a high level, things are as you would expect. Higher-growth companies — particularly in the top-left area — generally yield less as they are reinvest more of their earnings. The group slopes down and to the right, as lower-growth companies — especially the larger ones — generate more free cash flow.
Here are three observations:
The Big Divide: A clear gap has opened up between the two supermajors, Exxon Mobil Corp. and Chevron Corp. A few years ago, Chevron was like a distended python swallowing an alligator, its budget swollen by a string of mega-projects. Now that those are digested and spending has abated, the company is enjoying growth from new projects and free cash flow. In contrast, Exxon’s production growth through 2020 is expected to be the weakest of the entire group, and it is spending heavily on new projects. Forecast free cash flow of $39 billion over the next two years isn’t small. But there’s no sign of buybacks returning. Moreover, it is smaller than Chevron’s $41 billion, and Chevron’s market cap is a third smaller (and it has started buying back stock again). Meanwhile, ConocoPhillips may lack the integrated model of Exxon and Chevron, but is the biggest E&P company out there and offers a better combination of growth and free cash flow than either of them.
Northern Exposure: No one yields more than those Canadians in the bottom right. Oil sands might not offer much in the way of growth, but their leverage to oil prices and low depletion rates make for a lot of cash flow. But beware. First, Canadian Natural Resources Ltd. and Cenovus Energy Inc. are trying to cut their debt piles, so some of that free cash flow will go to bondholders rather than shareholders. Second, leverage to oil prices means the recent sell-off could rein in those cash flow forecasts significantly. That’s especially so considering Canadian crude is suffering huge discounts due to logistical bottlenecks that make the Permian basin’s problems look easy. While the rest of the industry takes fright at sub-$70 Brent crude oil, barrels in western Canada go for $16. Cenovus took the extraordinary step this week of calling on the Albertan government to mandate production restrictions (a bit like OPEC, eh?). Meanwhile, new rules on emissions from ships due to come into force in 2020 present a risk to Canadian producers of heavy, sour barrels (see this). Suncor Energy Inc. stands apart in several respects. Leverage, along with sensitivity to Canadian crude oil discounts, is lower, the latter reflecting Suncor’s greater degree of downstream integration. Production growth of high single-digits a year is more like that of an Occidental or Marathon than a supermajor. As if to reaffirm this, Suncor recently bumped up its buyback program from $2 billion to $3 billion.In a week as bad as this one for oil, the most pertinent thing to keep in mind is that all forecasts are subject to change. If the industry really has learned the lesson of the past few years, it is the yield axis on that chart that should dominate planning. It is almost certainly where the firmest support lies in this market.