Q3 2014 Integrated Oil & 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.
We estimate the total upstream capital expenditure by Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), BP Plc. (NYSE:BP), Royal Dutch Shell Plc. (NYSE:RDSA), and Petrobras (NYSE:PBR) to have constituted more than 85% of their overall capital expenditure during the third 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. Shell, Exxon, Chevron, BP, and Petrobras together spent almost a $150 billion on acquisition, exploration and development of hydrocarbon reserves last year, compared to just around $88 billion in 2009. 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.
We estimate that the integrated oil and gas companies we cover together spent over $34 billion on purchasing, repairing and upgrading their upstream physical assets during the third quarter of this year. The table below, which is compiled using data from SEC filings and our estimate of Petrobras’ third quarter upstream capital spending, summarizes total upstream capital expenditures (in millions of dollars) made by these companies in each of the quarters since the beginning of 2012, along with the year-on-year percentage change in the most recent quarter.
Petrobras hasn’t yet announced its third quarter financial results due to ongoing corruption investigations. The company expects to release its unaudited financial statements for the 3-month period ending September 30 on December 12. Therefore, we are not yet aware of the actual amount the company invested in its upstream operations during the quarter. The figure used in the above table represents our own estimate of the metric. [1]
The decline in both Exxon and Shell’s upstream capital spending this year has been on expected lines since the companies are making a conscious effort to tone down their capital expenditures in a bid to improve capital efficiency and boost returns. During the most recent annual Analyst Day presentation, Exxon’s officials announced that they expect 2013 to be a peak year for capital expenditures in the short to medium term and do not expect the company to spend more than $40 billion on leasing rigs, floating oil platforms, installing pipelines, and repairing oil-refineries this year. [2] Shell is going through a similar capex cycle as Exxon. Having spent more than $44 billion in total capital expenditures last year, the company vowed to improve its operating cash flows by capping organic capex at $35 billion this year. Shell also announced a $15 billion divestment program aimed at improving its overall profitability. The sharp 33% decline in its third quarter net upstream capital expenditures was a result of both lower organic spending and higher proceeds from asset sales. [3]
Chevron’s upstream capital spending declined by around 10% y-o-y during the third quarter after increasing by more than 8.3% y-o-y during the first half. For the first 9 months, the company’s upstream capital spending increased by 1.4% y-o-y. This could primarily be attributed 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 nine months spending being at 72.9% of its full-year target of $39.8 billion. If it continues to execute well, Chevron’s total fourth-quarter capital expenditure could decline by around $2.2 billion or 16.9% y-o-y, by our estimates. [4]
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Notes:- Third Quarter 2014 Financial Statements, investidorpetrobras.com [↩]
- Exxon Mobil 2014 Analyst Meeting, exxonmobil.com [↩]
- Royal Dutch Shell Plc. Third Quarter 2014 Results Announcement, shell.com [↩]
- Chevron Announces $39.8 Billion Capital and Exploratory Budget for 2014, chevron.com [↩]