Tech frenzy in the US stock market, while oil giants "splurge", cannot hide their embarrassment

Exxon Mobil and Chevron are offering shareholders returns that haven't been seen since their heyday over a decade ago. Last year, they returned $58.7 billion to shareholders, and even with the decline in oil prices, they are expected to return even more cash to shareholders by 2024. However, these oil giants are struggling to compete in the US stock market, which is dominated by tech stocks.

Chevron achieved record production in 2023 and bought back 5% of its shares. It is expected that the production growth rate of oil and gas this year will reach 7%, mainly driven by low-cost oil production in the Permian Basin. Last Friday, the company's stock price rose 3% after its earnings report, slightly outperforming Shell's performance the day before. On the other hand, Exxon Mobil's stock price fell 0.4% as it obtained a large amount of cash from rapidly growing oil exploration in Guyana.

Despite their impressive operational performance, they are still falling further behind tech giants Meta Platforms and Amazon. After announcing their earnings last week, the stock prices of these two companies rose by 20% and 8% respectively. Meta's price-to-earnings ratio is already twice that of the oil giants. Due to its cancellation of share buybacks and distribution of dividends, its market value has increased by $197 billion. The company, which owns Facebook, Instagram, and WhatsApp, now has a market value three times that of Exxon Mobil.

Chevron CEO Mike Wirth said, "We are an important industry in the global economy, and this industry has been around for a long time and will continue to exist for a long time. For patient shareholders, this is a real value opportunity." He added that the company has increased dividends for 37 consecutive years.

The United States is now the world's largest oil-producing country, with production about 45% higher than Saudi Arabia, largely thanks to the frenzied drilling by Exxon Mobil and Chevron in the Permian Basin in Texas and New Mexico. Despite efforts to transition the global economy, the demand for this fuel remains high, and it is expected to increase in consumption until at least 2030. However, investors seem to be indifferent. Energy stocks only account for 3.7% of the S&P 500 index.

Jeff Wyll, a senior analyst at Neuberger Berman, which manages around $440 billion in assets, pointed out, "This should be a green-lit sign. Considering the importance of this industry in the global market, how much more can it shrink?" "

Stock investors seem to be sending a clear message: tech giants are the future, while oil giants are the past. And they're not wrong. Artificial intelligence and cloud computing offer decades of potential profit growth, while the transition to low-carbon energy poses a survival threat to oil giants. The cyclical nature of oil prices, as well as the dependence on reduced supply from Saudi Arabia, means that investors see the cash flow of oil companies as less stable than their competitors in the tech industry.

Wyll said, "To get higher price-to-earnings ratios in this industry, investors need to see oil as returning to a scarce era. We may reach that goal in a few years, but we're not there yet."

Exxon Mobil and Chevron are determined to build businesses that can withstand this volatility, just as they have done in their over 140-year history. Both companies are making significant investments in Guyana and the Permian Basin, where the cost of oil extraction is below $35 per barrel, about $40 lower than the current price. Refining and petrochemical products provide a natural hedge for oil, and Exxon Mobil is expanding its trading business to boost profits.

Dan Pickering, founder and chief investment officer of Pickering Energy Partners, said it could be a good business move, but it's hard to buy into it in this market. Pickering said, "Meta announced a stock repurchase authorization that's basically the size of two oil companies. Chevron says, 'We're doing well in the Permian Basin.' But that's not getting people excited."

Like all commodity markets, too much success can lead to their downfall. By increasing production in the Permian Basin by about 10% over the next two years, Exxon Mobil and Chevron will increase global supply, putting them at risk of oversupply. They also face the risk of losing market share to Saudi Arabia, which crashed oil prices in 2014 and 2020, squeezing out marginal suppliers.

For Wirth, these risks are very real. He said, "Throughout the cycle, we've been very committed to capital discipline. The oil industry doesn't always show that, and I think it's important for our company and others to remember the lessons of the commodity markets.