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Exxon, Shell employ strategies to 'jumpstart' growth for higher returns

At a time when competitors are clamping down on spending and buying back stock, many oil and gas majors such as Exxon Mobil Corp. and Royal Dutch Shell PLC are taking different approaches to generate cash and return shareholder value.

Exxon is proceeding with an ambitious capital expenditure and expansion plan, even after some of the company's financial results failed to impress and production dropped to its lowest first-quarter level in 20 years.

For the first three months of the year, Exxon's total output slipped 6% on the year to about 3.9 million barrels of oil equivalent per day. This was down from an S&P Capital IQ consensus expectation of 4.07 MMboe/d. For full year 2017, ExxonMobil produced 4.0 MMboe/d, about 10% less than its peak output achieved in 2011 despite acquisitions since that time, according to an April 27 note from Edward Jones analyst Brian Youngberg.

"Unlike peers who are returning excess cash to shareholders by repurchasing shares, ExxonMobil is raising capital spending in coming years to jumpstart growth, with a focus on higher return projects. While this may prove to be a good decision should it execute well on the strategy, investor sentiment is likely to remain negative until it starts to show some fruition from it in 2021," Youngberg wrote.

Earlier this year, Exxon announced plans to triple its oil and natural gas production in the Permian Basin to more than 600,000 boe/d by 2025. During its first-quarter earnings call, the company said it had 31 rigs operating in the Permian and the Bakken, with production from the two regions rising 18% on the year.

Amid its heightened attention on the Permian, Exxon's first-quarter capital and exploration expenditures were $4.9 billion, increasing 17% from the same quarter in 2017.

As crude oil prices began to rebound in 2017, Exxon had already dumped billions of dollars into the development of assets in the Permian Basin. The company spent more than $6 billion to more than double its Permian potential by acquiring privately owned companies with an estimated resource of 3.4 billion barrels of oil equivalent in the Delaware Basin.

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Youngberg expects that Exxon's production growth will average between 1% and 2% per year through 2020, with increased output from U.S. oil shale and new projects offsetting any declines. After 2020, the company will focus even more on domestic shale as it aims to reach its 600,000-boe/d Permian output target by 2025.

"While capital spending will be going up, we expect net debt can come down modestly. Share repurchases will not be restarted for the foreseeable future," Youngberg added.

Meanwhile, Royal Dutch Shell is cutting costs sharply and sustaining production, having witnessed disappointing cash flow figures over the last several quarters.

During the first three months of the year, Shell's cash generation from operations once again fell short of analysts' forecasts, coming in at about $9.43 billion, rebounding on the quarter but down 1% from $9.51 billion during the same period in 2017. Estimates from S&P Capital IQ had pegged Shell's cash flow atop $11 billion for the period.

To support cash flow generation, many majors such as Shell have been keeping a lid on CapEx since 2013, right before oil prices started to crumble. Shell's capital investments for the first quarter totaled more than $5 billion, down from more than $6.7 billion in the fourth quarter of 2017.

"We project a modest reversal of that trend in the next few years, but the significant efficiency improvements in the industry suggests that capex is unlikely to approach the high levels of 2013. Activity levels have not fallen nearly as far as dollar-denominated investment levels, which have declined in aggregate by nearly 50% since 2013," according to a May 15 report from S&P Global Ratings.

While capital discipline should also continue to boost free cash flow for Shell, another integral part of the company's strategy to generate cash lies in its planned asset sales. Shell remains on track to divest assets worth a total of $30 billion by the end of this year.

To help reduce debt and move the company closer to that $30 billion divestment goal, in early May, a Shell subsidiary said it would sell its stake in oil-sands producer Canadian Natural Resources Ltd for about $3.3 billion. Following the prolonged downturn in oil prices that began in 2014, Shell said it would shed most of its Canadian heavy oil operations.

Amid the debt-reducing measures and once oil prices started to recover, at the end of 2017, Shell said it would restart its share buyback program. The oil major introduced a scrip dividend in 2015, giving shareholders the option to be paid in either shares or cash, as the company faced sliding oil prices and acquired BG Group PLC. But the company has offered few details on the timing of the buyback program over the last few months amid its less-than-stellar cash flow generation.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings. The original S&P Global Ratings documents referred to in this news brief can be found here.