Western oil majors yet to ramp up capex despite higher crude prices

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“Saudi Aramco is increasing its capital investment budget for 2022 to around $45 billion, compared to analysts’ consensus expectations of around $36 billion, as it recycles higher profits into efforts to increase oil output, but its Western oil major equivalents are being so much more careful,” says AJ Bell Investment Director Russ Mould.

“Although capital investment is set to rise by more than a quarter for 2022, budgets are not changing much and spending as a percentage of revenues remains near historic lows, even as Western leaders scratch around for more supply and place a newfound (if belated) emphasis on energy security.

BP, Chevron, ConocoPhillips, ExxonMobil, ENI, Shell and TotalEnergies even slightly undershot forecasts for spending in 2021, as their aggregate capital investment spent came to a fraction under $75 billion.

“A big lift in spend is planned for 2022 but none of the seven majors have increased their budgets in any great way and, in dollar terms, total investment this year is currently set to come in at less than half of 2013’s peak. Spending as a percentage of sales is only set to reach 6.6% this year, a figure which only just exceeds the lows of 2005-06.

Western oil majors yet to ramp up capex despite higher crude prices

Source: Company accounts, Marketscreener, consensus analysts’ forecasts for BP, Chevron, ConocoPhillips, ENI, ExxonMobil, Shell and TotalEnergies

“Environmental campaigners may rejoice at this and see it as an important step on the way to the net-zero world so actively championed at COP26 in Glasgow last November. Whether hard-pressed householders and under-pressure politicians see it in quite the same way now, a mere four months on from that event, is harder to divine as Western leaders seek to stir up better relations with Saudi Arabia or sanctions-hit, one-time pariahs such as Iran and Venezuela.

“The oil majors themselves may be reluctant to move as they still have the words of COP26 ringing in their ears, let alone calls from shareholders for greater capital discipline after the how the spending splurge of 2011-15 set the stage for oil price weakness in 2018-19 (well before covid). Government reluctance to permit new drilling work or pipelines in certain jurisdictions are an added complication, as are threats of windfall taxes on profits and banks’ and insurers’ apparent reluctance to provide their services when it comes to the development of major new fields.

“Saudi Aramco may face less pressure on several of these fronts and is looking to jack up spending and production accordingly, but there will be no overnight quick fix as output is expected to grow by perhaps three million barrels a day, to 13 million, by 2027 – that is equivalent to around 3% of global daily demand.

Western oil majors yet to ramp up capex despite higher crude prices

Source: Company accounts, Marketscreener, consensus analysts' forecasts

“Ultimately, the usual cure for high prices of anything, including oil, is high prices as affordability issues prompt buyers to cut back or seek or developer cheaper alternatives.

“California Governor Newsom’s outline of a multi-billion-dollar plan to offer his state’s inhabitants a tax rebate (or effectively a subsidy) on their consumption of fuel at the forecourt pump, or at least suspend a planned tax increase that is slated for July. France looks to be going down a similar path with a rebate of €0.15 per litre of transport fuel to help drivers.

“Neither policy will encourage a change in patterns of behaviour and energy consumption and will only perpetuate or boost demand for oil on the one hand, when on the other cries for more environmentally-aware policies are potentially restricting supply and deterring investment on the other.

“As a result, they may simply set the stage for further increases in the price of crude.

Aggregate consensus analysts’ forecasts
  Dec-21 Mar-22
Capex 2021 ($ billion) 76.9 74.6
Capex 2022E ($ billion) 96 95.6
Capex 2023E ($ billion) 100 100.7
  Dec-21 Mar-22
Capex / sales 2021 6.3% 6.3%
Capex / sales 2022E 7.4% 6.6%
Capex / sales 2023E 8.0% 7.4%
  Dec-21 Mar-22
Capex / depreciation 2021 0.69 x 0.65 x
Capex / depreciation 2022E 0.88 x 0.84 x
Capex / depreciation 2023E 0.92 x 0.89 x

Source: Company accounts, Marketscreener, consensus analysts’ forecasts for BP, Chevron, ConocoPhillips, ENI, ExxonMobil, Shell and TotalEnergies

“If there is to be a surge in spending on new oil and gas drilling then it would be logical to assume that oil equipment and services firms would feel the benefit. Those stocks have been in the doldrums for the thick end of a decade, given how the oil majors’ spending peaked in 2013.

“The iShares Oil Equipment & Services ETF, which tracks the performance of a basket of 25 stocks, including Schlumberger, Halliburton, Baker Hughes, TechnipFMC and Valaris, is starting to show some signs of life, but it is still trading much, much nearer to its all-time lows than its all-time highs.

Western oil majors yet to ramp up capex despite higher crude prices

Source: Refinitiv data

“The UK is blessed with expertise in this industry and the share prices of Hunting, Wood Group and Weir are moving higher, even in Lamprell is still mired near all-time lows thanks to concerns over the group’s financing arrangements, despite last year’s capital raising and new working capital facility, even as it looks to position itself as a leading player in the wind-turbine market, to complement its offshore oil engineering skills.

“Meanwhile shares in industry sub-suppliers such as well-head maker Plexus and specialist steel tubing manufacturer Pressure Technologies continue to go nowhere fast. Both AIM-quoted firms trade at or close to all-time lows but both could benefit if one result of a drive toward greater energy security is Governments permit and actively encourage more investment in hydrocarbon output, as concerns over the cost of living outweigh those concerning the environment, at least in the near term.”

These articles are for information purposes only and are not a personal recommendation or advice.


The chart of the week is written by Russ Mould, AJ Bell’s Investment Director and his team.