Exxon Did Great, But Something’s Missing

(Bloomberg Opinion) -- Exxon Mobil Corp. needed a good quarter, and it got a good quarter. It beat the consensus earnings estimate in the third quarter, having missed in the previous three. Sure, the margin of victory owed a bit to disposals and favorable tax treatment, but there were big underlying gains in both the upstream and downstream businesses. In particular, Exxon notched up its fourth positive bottom line in a row for its U.S. upstream business, a persistent source of losses for several years previously.

Exxon Did Great, But Something’s Missing

But Exxon needs more. Because its competitors aren’t doing badly either.

There has been a remarkable recovery in free cash flow across the majors. On a trailing four-quarter basis, Exxon has notched up 16.6 billion, but closest rivals Chevron Corp. and Royal Dutch Shell Plc aren’t far behind:

Exxon Did Great, But Something’s Missing

Where this really matters, though, is in relation to shareholder payouts. Here’s free cash flow for the group after dividend payments are deducted:

Exxon Did Great, But Something’s Missing

Chevron Corp. also reported results on Friday morning and also beat earnings forecasts. But it’s the cash flow that gives it an edge.

Earlier this year, Chevron launched a $3 billion buyback program, and it repurchased $750 million in the quarter. This matters for two reasons. First, while Exxon’s dividend yield of 4 percent is slightly above Chevron’s, the latter’s overall yield including the buybacks comes to 5.2 percent.

It’s only a small edge. But the contrast is quite striking, given large buybacks were Exxon’s calling card for years; and it is now conspicuous by its reluctance to restore them even as its peers have pulled the trigger. Chevron’s buybacks reflect not just the benefits of higher energy prices compared with last year, but also its strong production growth and balance sheet. The company just reported its highest quarterly production ever, with growth of almost 9 percent year over year (Exxon’s fell by 2.4 percent, with natural gas the main culprit once again). Meanwhile, Chevron’s leverage continues to drop:

Exxon Did Great, But Something’s Missing

Part of this is a timing issue, with Chevron harvesting earlier chunky investments (which put it in the doghouse a few years ago), while Exxon has big new investments such as offshore Guyana and its integrated position in the Permian basin and the Gulf Coast. The latter is coming together and holds out the prospect of a big step up in cash flow several years out. But with Chevron showing more momentum, justifying Exxon’s continued premium across a range of multiples demands more. The continued absence of buybacks, and the confidence they would signal, isn’t helping.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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