What Exxon and Chevron are doing with their new cash flow

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Two things to start: The saga over whether the Dakota Access Pipeline will be shut down while an environmental review is carried out rumbles on after the US Army Corps of Engineers yesterday punted the decision back to the courts. The federal judge overseeing the case is expected to make a decision on whether to shut the line later this month.

And second, the Biden administration’s plan to slash US emissions gained pace yesterday after the Environmental Protection Agency announced a clampdown on hydrofluorocarbons.

Welcome back to Energy Source.

Our first item takes a look at what the earnings season has told us about the state of the recovery in the oil sector — and why this time it’s different.

Our second is an interview with the head of the onshore business at wind giant Orsted, who tells ES why pumping funds into winterising turbines is not the answer to the kind of Big Freeze seen in Texas in February.

We’re experimenting with sending this email one hour later than we have previously because we think it will better suit our readers. Are you happy with the change? Let us know at energy.source@ft.com. And if this newsletter was forwarded to you, click here to receive Energy Source in your inbox every Tuesday and Thursday. — Myles

Big Oil back in black but still under green pressure

After a brutal pandemic year, the world’s oil majors returned to profitability in the first months of 2021, buoyed by a recovery in energy consumption and a rally in crude prices. Better earnings are likely to be reported across the sector in the coming few weeks.

But it’s clear this recovery won’t be like others the companies have been through. In past boom-bust cycles, the return of higher prices would have seen the supermajors fire up plans for expensive exploration and production projects shelved during the downturn.

This time, the majors are promising to keep a tight hold on the purse strings regardless of crude prices. ExxonMobil’s capital spending in the quarter was down more than 50 per cent while Chevron’s was 43 per cent lower compared to last year.

Investors are telling the companies they want cash now. They don’t want to see that money ploughed into projects that would only pay off over the next couple of decades, when the outlook for crude demand, and prices, is less certain.

For its part, Big Oil is laying out plans to return cash to shareholders through dividends and share buybacks while paying off billions in debt taken on during last year’s market crash.

Chevron lifted its dividend last week, signalling a stronger financial footing. ExxonMobil said its free cash flow of $9.3bn, the second highest of any quarter since 2014, was enough to cover its dividend, capital spending and pay down $4bn in debt. It had been borrowing heavily to pay the dividend.

Both companies could be in a position to start buying back shares — a key to luring back investors and underpinning equity prices — later this year if the economic recovery continues and debt is brought under control, analysts say.

Green spending is here to stay

What is also clear is that better profitability in oil and gas is not going to put an end to questions about the transition to cleaner fuels.

Analysts repeatedly quizzed both Exxon and Chevron on their respective green plans — around a third of the questions on each earnings call focused directly on the topic.

Both continue to resist calls to follow their European rivals into renewables and lay out net-zero emissions targets. Rather, they are promising to slash emissions from their own production, while hunting for low-carbon growth opportunities more closely tied into their core oil and gas businesses.

Exxon has made a big push on carbon capture and storage (CCS) of late, proposing a still-vague $100bn megaproject in Houston.

But chief executive Darren Woods told analysts that CCS was still at the “early stages of a new business” and more, especially on the policy front, is needed to make it viable.

Both companies are planning to spend less than 5 per cent of annual capital expenditures on low-carbon businesses in the coming years.

Whether that is enough to keep increasingly climate-minded shareholders onside will be put to the test at the companies’ annual shareholder meetings next month — where both face climate votes.

Chevron faces a vote that would force it to reduce the emissions not only from its direct operations but also from the broader use of its products — so-called scope 3 emissions — which could effectively bring it more in line with its European rivals.

Exxon’s shareholder meeting will bring the proxy fight with activist hedge fund Engine No 1 to a head, with shareholders set to decide on a proposed overhaul of the board and faster pivot into low-carbon businesses. (Justin Jacobs)

Energy Source Live

The FT Energy Source Live event will be taking place on May 24-25, 2021. Join industry CEOs, thought leaders, energy innovators, policymakers, investors and other key influencers to hear the latest thinking and insights on the future of US energy leadership and its global context. Find out more here.

Wind lessons from the Texas freeze

As the dust settles on the February storm that disrupted Texas’s electricity markets, chatter over how to prevent a repeat event still dominates energy conversations. 

Texas lawmakers have put “winterisation” at the centre of the state’s response to the power crisis: ensuring equipment is kitted out to cope in the next bout of sub-zero weather.

That may be the answer for thermal power producers and gas pipeline operators that were brought to a standstill by the freezing temperatures, says Declan Flanagan, head of the onshore business at wind developer Orsted. But not for wind operators.

“The lesson is not to dump a bunch of capex into a cold weather package,” said Flanagan. 

Winterisation makes sense for turbines in locations that — unlike Texas — regularly suffer extreme cold weather spells. But cold weather packages can run into the hundreds of thousands of dollars and add anywhere from 5 per cent to 10 per cent to a turbine’s cost.

“The kind of stuff you would do if you’re building . . . in the Dakotas or Nebraska wouldn’t have made a big difference here. So that’s not really the takeaway from the Texas event as applies to wind power.”

Texas was brought to a halt in February by a blast of Arctic weather that knocked out much of its power grid and forced millions of people to face freezing weather without power and heat.

Texas’ grid operator Ercot said in a recent report that natural gas accounted for the majority of the outages on the system. Low wind speeds, Ercot said, cut the amount of power turbines would have been expected to produce by about half, while iced blades further reduced output.

Given a lack of wind was a far more significant issue than frozen blades, said Flanagan, the solution for Texas wind operators is not to pump funds into winterising equipment. Rather it is to avoid overreliance on any one form of generation in any one location. “That’s the real lesson here: that diversity in your renewables fleet by geography and by technology really adds to the market.”

The importance of rewiring the grid

Looking to what Washington can do to support the rapid growth of renewables across the country, one area is key, said Flanagan: transmission.

The most valuable thing the current administration can do for renewable energy is to reinvigorate the country’s ageing power infrastructure, he said, making it fit for purpose as the power mix increasingly tilts towards renewables. 

“If you can only do one thing as a federal policymaker, addressing transmission is what you should focus on,” said Flanagan. “It’s old and it was configured for the way we used to produce power 30 years ago, so that needs a lot of investment.”

As part of his infrastructure drive, the president has proposed the largest investment in clean energy in US history.

That plan would pump $100bn into US power infrastructure. The president has also advocated a targeted investment tax credit that he says would incentivise the buildout of more than 20GW of high-voltage power lines, spurring private investment. 

These efforts — more so than plans to extend and expand tax credits for wind and solar — are key to ensuring renewables can continue their march in the US, said Flanagan.

“The energy transition is pretty unstoppable now,” said Flanagan. “[But] if you look over the next 10 years, [transmission] is probably the single biggest issue or potential slowdown,” he said. (Myles McCormick)

Data Drill

New data from the US Energy Information Administration show Texas’ oil output fell nearly 20 per cent in February as wells and pipelines froze up during the winter storm. It was the state’s lowest production level since early 2017, when the Permian boom was still gathering pace. Companies say output lost during the storm has mostly returned.

Power Points

  • Big Read: In Australia, the world’s second-biggest coal exporter, discussions around phasing out fossil fuels remain contentious.

  • Fewer than a fifth of big investors are confident that oil companies will successfully transition to become greener businesses.

  • Japan’s ambitious plan to slash carbon emissions has been criticised as unrealistic and sparked panic among officials tasked with implementing it.

Energy Source is a twice-weekly energy newsletter from the Financial Times. It is written and edited by Derek BrowerMyles McCormickJustin Jacobs and Emily Goldberg.

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