President Andrés Manuel López Obrador has made a major bet on state oil company Pemex and is building a new refinery © AFP via Getty Images

One thing to start: BP’s fourth-quarter profits plunged. After Chevron’s quarterly loss on Friday, the UK company’s performance shows that almost a year after the mother of all market crashes, things are still not quite right for these huge oil producers. Reporting today are ExxonMobil and ConocoPhillips — the market expects both to record significant fourth-quarter losses. For Exxon, it will cap a busy few days of headlines.

Hello from the Energy Source team. Today’s newsletter starts in Mexico, where Jude Webber writes about the country’s oil revenue. Our second note reflects on yesterday’s deep dive into the US shale patch, where stronger oil prices may at last make the sector profitable — but only if operators can resist the urge to start pumping hard again.

Thanks for reading. Please get in touch at You can sign up for the newsletter here. — Derek

Mexico doubles down on its oil bet

First, the good news: Mexico’s annual oil hedge — a kind of insurance policy the government takes out every year to protect its state finances against price falls — raised $2.38bn last year.

The bad news: oil revenues, still an important contribution to state coffers, crashed nearly 40 per cent.

The worse news: despite Mexico’s big bet on Pemex, production and refinery output remained under pressure.

Gabriel Yorio, deputy finance minister, said the hedge payout “served to compensate for 80 per cent of the fall in oil income that we suffered” amid the Covid-19 pandemic, which caused oil prices to plummet.

On Friday, he signalled that the government would continue hedging. It is the fourth time that the operation, one of the biggest trades in derivatives markets, has paid out to the government since the annual hedge began two decades ago.

In the past, the government has spent about $1bn on the policy but has not divulged full details of last year’s operation.

But the hedge aside, how did oil income fare last year? A painful decline of 38.7 per cent to just under 606bn pesos ($30bn), versus 956bn in 2019.

President Andrés Manuel López Obrador has made a major bet on state oil company Pemex and is building a new refinery — even as the US and Europe make ambitious bets on turning their economies carbon neutral by 2050. Even General Motors announced last week that it would phase out petrol and diesel cars by 2035.

The president is widely believed to be laying the foundations to roll back the 2013 energy reform in order to give priority to Pemex and the state electricity company, CFE.

Although Pemex requires significant amounts of government aid — amounting to at least 1.4 points of GDP a year — it says it delivered nearly 13 pesos to the state in duties and taxes for every peso the federal government invested in it last year.

Pemex publishes its 2020 results on February 26, but the outlook remains challenging.

Oil production last year, including partners, dropped nearly 1.1 per cent to average 1.66m barrels per day from 1.68m in 2019 according to company figures.

However, Pemex’s own sums do not appear to add up. In a presentation to investors last month, Pemex said production, including with partners, averaged 1.7m bpd in 2020, an increase of 0.1 per cent, and would have been 1.732m bpd if Mexico had not agreed to cuts in line with Opec and other producing nations earlier last year.

Nevertheless, this year’s target — a 14 per cent rise to 1.944m — looks like an impossible leap. (Jude Webber)

Shale gets serious about profitability

“The growth investor is out,” said Scott Sheffield, head of Pioneer Natural Resources. “Now we’re attracting dividend portfolio managers . . . because we never had a dividend before. And now we’re talking about 4, 5, 6, 7 per cent dividend yields.”

Mr Sheffield was talking about the shale sector’s latest upheaval: a thrust for profitability. Gone are the days of soaring annual production growth; in comes an era of higher margins, debt repayment, and shareholder returns. This nascent shift was the subject of yesterday’s Big Read from Myles McCormick and me.

Can the promises be trusted? Shale operators pledged similar discipline after the oil price crash of 2014-15. Wall Street, believing them, piled in with cheap credit. Production soared, but free cash flow never consistently materialised.

Now, says Mr Sheffield, “if oil is $100 a barrel we’re still only going to grow 5 per cent”.

It was a message of new capital discipline repeated in scores of interviews with executives in the sector.

“We’re a low-growth industry,” said Pierre Breber, Chevron’s chief financial officer. “To have companies growing at 5 or 10 per cent in a 1 per cent growth industry never made sense to me. This should be an industry that generates high returns. That’s what we need to get back to.”

Having lost the growth investors, operators want their new “slow shale” movement to woo the value investors.

“The investors that we really need to target . . . are those that are longer-term holders,” said Vicki Hollub, Occidental Petroleum’s chief executive.

And, according to Rick Muncrief, head of the newly merged Devon Energy, there is plenty of investor interest. “Among larger publicly traded companies, low-to-no growth is the expectation,” he said.

Between the start of 2016 and the end of 2019, US shale production jumped almost 80 per cent. In the same period, the market value of the S&P 500 energy sector rose just 2 per cent.

Now, after a sharp drop in US production and the shock of last year’s price crash, those same battered equities have been outperforming the wider market in recent months, confirming — it would seem — investors’ new appreciation for slow shale movement. Operators could even generate significant free cash flow this year, predicts Rystad Energy.

Column chart of Free cash flow ($bn) showing US shale companies are beginning to live within their means

Wil VanLoh, head of private equity shale investor Quantum Energy Partners, told us that things were different now — from the ashes of the crash, many operators are emerging as more viable companies, no longer crippled by debt obligations.

“A lot of the structural problems in the industry have been cleaned up,” he said. “Unlike back in the 2015-16 wave, where the bondholders might have converted 20 per cent of the debt to equity, now it is all getting converted to equity.”

And the consolidation should help operators drive down costs. Mergers should cut back some of the shale patch’s notorious general and administrative costs, for example. And as producers sew up contiguous land positions — as Pioneer managed with its Parsley Energy purchase — they should be able to drill longer lateral wells, cutting capital expenses.

A more efficient sector, able to break even at lower oil prices, should emerge — once again.

Will it resist the urge to pump more oil? Already, private operators — which account for 30 per cent of onshore US production — are increasing drilling activity. Oil prices in the mid-$50s are more than high enough for them to justify firing up more rigs, and no shareholders are demanding they sit still. When will public operators follow?

Matt Gallagher, the former chief executive of Parsley, which itself was taken over by Pioneer, said the new focus on profits, not supply growth, must pass through the test of higher oil prices to earn investors’ trust.

“We’re not going to find the test until you see $60 plus WTI,” he said. “And the test is this: can people maintain, or increase margins, which is what’s supposed to happen when oil goes up? . . . I think it’s going to be harder done than said.”

(​​Derek Brower)

Data drill

We’ve been awash with ambitious-sounding pronouncements from presidents and prime ministers promising to reshape their economies around mid-century net-zero targets ahead of the COP26 climate talks later this year, a critical follow-on to the Paris agreement.

Is it backed up by the nuts-and-bolts policies needed to follow through? No, says a new report from BloombergNEF arguing that G20 countries’ climate policies “fail to make the grade on Paris promises”.

BloombergNEF’s scorecard for G20 countries found Germany, France and South Korea had done the most to put decarbonisation policies in place, but even they haven’t gone far enough. Unsurprisingly, two of the world’s biggest fossil fuel producers, Saudi Arabia and Russia, sit at the bottom of the table.

Bar chart of Decarbonisation policy scores by sector, % showing Europe leads on decarbonisation policies, oil producers lag

Power points


ES spoke with Chevron’s chief executive Mike Wirth last week. Here are some of our takeaways:

  • On the oil market recovery: “While we are through the worst of it we are not through all of it, and I think we all need to be prudent and realistic.”

  • On why Chevron won’t raise spending soon: “I’d rather be a quarter or two too late to call the turn than be premature and find out we began ramping up and then have to ramp back down. We intend to stay with our budget.”

  • On Biden’s climate executive orders: “Our strategy is higher returns, lower carbon. We get it. That said, these were sweeping actions indicated in the executive orders and a number of them do raise concerns,” he said pointing specifically to Chevron’s operations in the Gulf of Mexico, which could be hit by an extended leasing ban on federal lands.

Energy Source is a twice-weekly energy newsletter from the Financial Times. It is written and edited by Derek Brower, Myles McCormick, Justin Jacobs and Emily Goldberg.

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