Q2 2014 Integrated Oil and Gas Round-Up: Capital Expenditures

Vertically integrated oil and gas companies have both upstream as well as downstream operations. The upstream division primarily includes exploration and production activities for oil and gas, while the downstream division focuses on producing refined petroleum products such as gasoline, diesel and jet fuel. The upstream segment of the oil and gas industry is highly capital-intensive as huge amounts of capital is required for acquisition and exploration of hydrocarbon reserves, drilling and completing wells, floating oil platforms and installing pipelines.

The total upstream capital expenditure by Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), BP Plc. (NYSE:BP), and Petrobras (NYSE:PBR) was more than 37% of their total upstream sales and operating revenue, including intersegment sales, and constituted more than 81% of their overall capital expenditure during the second quarter. We therefore believe that it is a key valuation driver for the upstream operations of these companies. In this article, which is a part of our quarterly oil and gas industry review, we take a closer look at how upstream capital expenditures are trending for each of the integrated oil and gas companies we cover and how have they performed so far against their total capital expenditure plan for the full year.

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As can be seen from the chart below, annual upstream capital expenditures (in billions of dollars) by the integrated oil and gas companies we cover, have increased sharply over the past few years. Exxon, Chevron, BP and Petrobras together spent over a $110 billion on acquisition, exploration and development of hydrocarbon reserves last year, compared to just around $67 billion in 2009. ^[1] The sharp increase in capital expenditures by these companies can primarily be attributed to the surge in finding and development costs, as oil and gas reserves are getting increasingly difficult to find and develop leading to lower capital efficiency. According to a recent study by Evaluate Energy, finding and development costs for the major integrated oil and gas companies have increased from below $10 to over $20 per barrel of oil equivalent over the past decade. ^[2]

During the second quarter of this year, the integrated oil and gas companies we cover together spent over $29 billion on purchasing, repairing and upgrading their upstream physical assets. The table below, which is compiled using data from SEC filings, summarizes total upstream capital expenditures (in millions of dollars) made by these companies in each of the last 10 quarters, along with the year-on-year percentage change in the most recent quarter.

BP and Chevron reported a 9% and 10% y-o-y jump in their second quarter upstream capital expenditures, respectively, while Exxon Mobil and Petrobras showed some restraint in investing in their upstream assets, compared to last year. The growth in BP’s upstream capital spending this year has been primarily because the company has increased its focus on investing in upstream projects to boost its underlying hydrocarbon production. The company has already started production from five major upstream projects this year and is also working on bringing up two new projects in the second half. Therefore, despite a 3.6% decline in total organic capital spending, the company’s upstream capital expenditures actually increased by 10% y-o-y during the second quarter. We expect the trend to exhibit itself in the next couple of quarters as well since BP plans to limit its total organic capital spending at $24-25 billion this year, which is roughly similar to the $24.6 billion it spent last year. ^[3]

Chevron’s upstream capital spending has been higher this year primarily due to the ongoing development of two of its liquefied natural gas (LNG) projects in Australia, Gorgon and Wheatstone, which are being developed at a gross cost of around $83 billion. In 2012, Chevron announced a sharp $15 billion or a 40% spike in the total cost estimate for the Gorgon LNG project, which is expected to contribute over 200,000 barrels of oil equivalent per day to its total net daily production in the long run. Last year, the company further increased the total cost estimate of the project by another $2 billion giving it a gross price tag of $54 billion. However, this year, Chevron has not announced any cost spillover so far, and has stuck well to its total capital expenditure plan for the full year, with the first six months spending being at 49.3% of its full-year target of $39.8 billion. ^[4] If it continues to execute well for the rest of the year, Chevron’s total second-half capital expenditure could decline by around $3.5 billion or 14.3% y-o-y.

The decline in Exxon’s upstream capital spending this year has been on expected lines since the company is making a conscious effort to tone down its capital expenditures. The company officials announced during the most recent annual Analyst Day presentation that they expect 2013 to be a peak year for capital expenditures in the short to medium term. This year, Exxon plans to spend no more than $40 billion on leasing rigs, floating oil platforms, installing pipelines and repairing oil-refineries. ^[5] If we go by the company’s performance during the first six months of the year, it is well on track to meet its full-year capital expenditure target. Exxon has so far spent just $18.2 billion on purchasing, repairing and upgrading its physical assets, such as property, plant, and equipment, compared to over $22 billion during the first two quarters of last year. Beyond 2014, Exxon expects its total capital expenditures to decline further to an average of less than $37 billion annually. ^[6]

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1. SEC Filings, sec.gov [↩]
2. 7 Ways To Calculate Oil and Gas Finding Development Costs, evaluateenergy.com [↩]
3. BP Second Quarter 2014 Earnings Call Presentation, bp.com [↩]
4. Chevron Announces $39.8 Billion Capital and Exploratory Budget for 2014, chevron.com [↩]
5. Exxon Mobil 2014 Analyst Meeting, exxonmobil.com [↩]
6. Exxon Mobil Corporation 2Q14 Earnings Presentation Slides, exxonmobil.com [↩]