November 21, 2018 Read More →

Oil industry is facing a ‘capex conundrum’

The big question now is what do they do with the windfall? Spend more in order to grow production or return excess cash to shareholders? This is shaping up to be one of the defining questions of this new oil era, especially for the largest oil companies. 

To be sure, just about every oil executive trumpets their commitment to capital discipline when they get the chance. Wall Street clearly favors this approach. In the past, growth was the name of the game, and share prices rose and fell on growth in production and reserves. These days, profits and cash flow come first. 

Last week, the Wall Street Journal pointed out the different stock performances of companies that pursue these different strategies. Over the past year, ExxonMobil’s share price has been flat, as it has announced an aggressive spending plan and multi-year campaign to grow production. Meanwhile ConocoPhillips is shrinking, selling off assets, and focusing on shale drilling and shareholder returns. Exxon’s share price is flat, but Conoco has jumped by 25 percent. 

However, pursuing a strategy that prescribes returning every surplus dollar to shareholders is a recipe for long-term decline. The industry is “caught in a capex conundrum,” according to Tom Sanzillo and Kathy Hipple of the Institute for Energy Economics and Financial Analysis. 

Already the oil majors are slipping. “In 2008, the energy sector commanded roughly 16% of total Standard and Poor’s 500 market capitalization. Today, that figure has fallen to roughly 6%,” Sanzillo and Hipple wrote in a commentary. “In 1980, seven of the top 10 companies in the index were oil companies. Today, only ExxonMobil is in the top 10 (ranking tenth).” 

Oil industry is facing A ‘capex conundrum’

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