Predictions of winning Chevron and Exxon. The drop in oil prices continues to hurt.

Exxon Mobil and Chevron are meeting their financial goals and returning increasing amounts of cash to shareholders, but Wall Street is hardly shy.

Both companies beat earnings expectations on Friday, paying more than they did last year in dividends, and each said they were on track to buy back $17.5 billion worth of stock this year. But shares were barely moving in early trade.

It’s a sign of the ceiling equities are now facing with oil and gas prices lower than last year’s levels. Oil has recently been trading below $80 a barrel, versus prices above $100 last year at this time.

Chevron (Stock ticker: CVX) reported earnings per share of $3.55 compared to a consensus of $3.40. Shares fell 0.5 percent in pre-market trading on Friday.

Exxon Mobil (XOM), the largest US oil company, reported earnings of $2.83 per share, compared to a consensus of $2.60. Its shares rose 0.7%.

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There are signs of cost inflation that may cause concern among investors.

Chevron’s capital expenditures were up 55% over year-ago levels, even though its production was down 2.6%. CFO Pierre Breber said in an interview with Barron That the drop in production had to do with some of the discontinued operations, including a franchise in Thailand that is no longer operating. Its capital expenditures have risen largely due to its expansion in the United States, with the expectation that its production in the Permian Basin will rise significantly in the second half of the year. A small part of the increase had to do with inflation, Breber said.

“There is a gap between capital spending and production visibility,” he said, noting, “Our production in the Permian is end-loaded. You’ll see that particularly in the second half of the year, and you’ll see that in other parts of the portfolio.”

Exxon’s production is on the rise, growing by 150,000 barrels per day in the most recent quarter, or 4.2%, year over year. Capital expenses increased by 36%.

However, Chevron has been more aggressive than Exxon in its shareholder return policies. The company’s goal of buying back $17.5 billion worth of stock annually would reduce its stake count more than Exxon because Chevron has a smaller market cap. Its dividend yield is 3.6%, compared to 3.1% for Exxon.

However, both companies are now dealing with a different market than they faced last year: one with fewer obvious growth opportunities. They will also have trouble outperforming in 2022. Exxon is up 80% and Chevron is up 53%.

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A year ago, the war in Ukraine pushed Exxon and Chevron’s earnings to new heights. But oil prices have been trending lower even as the war drags on, with demand slowing around the world amid fears of a recession.

The forces that drove stocks higher last year have faded, and investors are waiting for the next catalyst.

At the most basic level, Exxon and Chevron are both strong. It has become more efficient than it was before the pandemic, and is constantly increasing its dividend and buying back shares. But they still have trouble attracting new investors because earnings are expected to vanish over the next few quarters.

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Although first-quarter earnings topped last year’s levels, this could be the last quarter for at least a year in which companies post annual gains. This is largely due to lower oil and gas prices, a factor that companies have no control over.

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One of the biggest questions analysts have in the coming quarter will be about mergers and acquisitions. Both companies are flush with cash, and analysts have been speculating about whether to strike deals to consolidate the industry and boost their stocks.

In the interview, Breber said any deal would have to remove a “very high bar” because Chevron has other avenues for growth.

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“We have multiple growth assets — not just in the Permian, but in the Gulf of Mexico growing 50% by 2026; Kazakhstan, where we’ve invested for a number of years in a very large project, that will start up by the end of the year; and other shale and tight [formations]in particular, DJ Basin in Colorado and Argentina.

However, he predicts that the industry will eventually consolidate.

“We have now spoken about our belief that this industry will strengthen over time, as it has been for 34 years in the sector,” he said. For a low-growth industry, there are many companies. And it’s hard to find another low-growth industry that has that many companies.”

Analysts expect some deals in the near future.

“Many producers could be acquired in the coming quarters given the desire of many companies like Exxon to build inventory,” Truist analyst Neil Dingman wrote earlier this month. “2023 has already started off as a brisk year for initial M&A and we think things can stay busy throughout the year.”

Given its strong balance sheet, Exxon is well-positioned to make acquisitions, Citi analyst Alastair Syme wrote. He believes the company could even buy a major European oil company.

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“We still argue that transatlantic mergers and acquisitions can bring huge financial backlog,” he wrote after the earnings announcement. “There are also opportunities of potential value through expansion (i.e., acquisitions) within the highly fragmented Permian Basin where Exxo remains only the No. 4 player (measured by resources).”

Exxon spoke with Pioneer Natural Resources (PXD), according to a report in The Wall Street Journal, though neither company has commented publicly on a potential deal. Exxon described it as “market speculation or rumour”. Chevron made several acquisitions early in the pandemic, but has been quiet lately — focused instead on ramping up its stock buybacks and boosting its dividend.

Over the past three years, investors have mostly been negative about acquisitions because they were afraid that buyers would pay too much. However, that may change if they believe that the oil majors can buy attractive real estate at affordable prices.

However, not everyone expects bargains. Pioneer Natural Resources CEO Scott Sheffield said in an interview with Barron This week, no mergers and acquisitions were expected in the near future, in part because acquiring companies seemed unwilling to pay large premiums.

Write to Avi Salzman at avi.salzman@barrons.com

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