Chevron prepares to take on ExxonMobil

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0:56If you sail roughly 120 miles into the Atlantic Ocean from the South American country of Guyana, you might just bump into some gigantic ships. These ships are sucking massive amounts of crude oil from reservoirs miles below the sea. That's because this otherwise nondescript stretch of ocean is a part of an extremely valuable oil project known as Stabrook

1:27Jamie Smyth: Stabrook is one of the most lucrative oil discoveries in recent decades It's estimated to contain up to$1 trillion worth of oil reserves For the past couple of years, it's also been at the heart of a bitter feud between two of the world's most powerful oil companies Chevron and ExxonMobil. This particular dispute was settled earlier this summer by an arbitration panel in a decision that matters for the entire industry. These two U.S. oil majors, Chevron and Exxon, you know, they're in a battle for the future. And in that future, there's not going to be very many oil companies because the oil market is changing.

2:08Jamie Smyth: We're going through an energy transition. There's going to be a limited number of companies that survive. And both of these companies want to be one of them.

2:19I'm Michaela Tendera from the Financial Times. Today on Behind the Money, which of the two largest American oil majors is best placed to survive the energy transition? Chevron or its much bigger rival, Exxon?

2:51I'm here with the FT's U.S. Energy Editor, Jamie Smith, who's been reporting on the competition between Chevron and Exxon. Hey, Jamie.

2:59Jamie Smyth: Hi, Michaela. Great to have you here. Yeah, great to be here. So this competition between Chevron and Exxon goes way back. Jamie, exactly how far back are we talking? Both these companies traced their roots back to the oil boom in the second half of the 19th century. ExxonMobil was part of Standard Oil, the industry giant which was set up by John D. Rockefeller almost 150 years ago. In the early 20th century, the US government split up Standard Oil into more than 30 companies. And two of these were the forerunners to Exxon and Chevron. At the time of the split, Exxon was larger and had more assets than Chevron, and that still exists today.

3:42This rivalry, how would you describe Exxon's place versus Chevron's?

3:48Jamie Smyth: Over the last century, Exxon and Chevron, you know, they've been competing trying to pick up the best oil and gas assets, but they've been competing also in the retail sector, you know, downstream in gas stations. And they've been competing, you know, even in the refinery business, the midstream business where they're working on efficiency. So they have been better rivals. Well, for almost all their entire histories, Exxon has been the larger and more dominant company. Around five years ago, in October 2020, that changed for a short time. Oh, how the mighty have fallen. Just seven years ago, Exxon Mobil was the world's most valuable company.

4:26But just yesterday, one of its biggest competitors, Chevron, overtook its market capitalization.

4:32Jamie Smyth: We had this single day where Chevron on the stock market, it overtakes Exxon and it becomes the biggest US oil major. And that really was a big moment. At that time, Exxon was having a rough time and it was really under assault from green campaigners who alleged the company had deliberately downplayed the risks of climate change. Exxon denied this, but this was really punishing the stock. And then, of course, you had the COVID pandemic. You know, that caused chaos in oil markets. And the big player got hit hard. Chevron's leapfrogging of Exxon was a blip. It didn't even last more than a day before Exxon reasserted its dominance in the public market.

5:16And this matters because both oil majors are competing to win over shareholders.

5:21Jamie Smyth: They're competing to differentiate themselves from one another, to tap into U.S. and other shareholders. They're both seeking to become the most efficient company in the industry and make higher returns to shareholders. Part of achieving that, as Jamie mentioned, means both companies are vying for the best oil and gas assets.

5:46Now let's jump ahead a few years to October of 2023. That's when Chevron makes a big announcement. It wants to buy another energy company, the Hess Corporation. And the jewel in the crown of Hess is a 30 % stake in that massive Stavrook oil field that I mentioned at the beginning of the show. It's one of the most prized oil assets on Earth. Analysts estimate it'll generate more than$370 billion in profits over the next 15 years. But Jamie, there was one problem with all this, wasn't there?

6:23Jamie Smyth: Well, one big problem was Chevron's rival Exxon had actually discovered the Stabrook oil field in the first place back in 2015. And Exxon owns a 45 % stake in that project. And Exxon was not at all happy with Chevron's moves on Hess. Exxon wasn't about to let Chevron muscle in on one of the world's most exciting oil discoveries. Exxon really wanted to block Chevron's acquisition of Hess. The company said under the contract it had already signed with its partners Hess and the Chinese company Sinuc to develop the field, it had the right to do so. But most analysts would say it wanted to deal a blow to its rival, Chevron.

7:10Jamie Smyth: And it actually wanted to own more of the Guyana discovery because it's such a lucrative oil asset. To pursue these goals, Exxon went to the International Chamber of Commerce with the aim of blocking the Chevron Hess deal. Cue a long and bitter legal dispute, which didn't do Chevron's stock price any favors. Since the arbitration began early last year, investors were concerned that Chevron would never get to own Hess. So that's basically made them nervous about buying Chevron stock. So that's been an overhang that's existed for over a year. So it's clear what Exxon's rationale was to want to stop this deal.

7:56But why was it so important to Chevron and its investors to make sure that it went through?

8:02Jamie Smyth: So Chevron are really pushing ahead with trying to do more exploration because they want to make more discoveries and they want to boost their oil reserves up. The arbitration over Hess really exposed a growing gap in the company's oil and gas reserves. Their oil reserves fell to 10 billion barrels last year, which is the lowest in a decade. So they want to boost that up so they can maintain their production levels into the 2030s and into the next decade. That's really key to keep their profitability up and ensure that they can compete with other oil majors. Why did the arbitration over Hess expose that growing gap you mentioned?

8:43Jamie Smyth: Well, so Hess exposed that because there was a danger that if Exxon had won the arbitration, Chevron wouldn't have got its foot into this really lucrative Guyana oil field. And without that, it would have been really, really difficult. The company wouldn't have had enough production to satisfy investors and it would have been a huge hit to the stock. And this rivalry between Chevron and Exxon, I mean, it got pretty personal, didn't it? Between the two respective CEOs, Darren Woods at Exxon and Mike Wirth at Chevron. These two men know each other really well. They would meet at various conferences and events and occasionally would have had dinner together or other informal meetings.

9:28Jamie Smyth: But when Exxon announced the arbitration, Wirth clearly expressed his disappointment in several interviews with media outlets. He told journalists he felt the arbitration was unnecessary. One of the other issues that Worth was upset about was that they were actually in talks to try and settle before the arbitration began. And those talks collapsed unceremoniously. People familiar with the issue told us here at the FT that this issue created tensions between the two men. But then in July of this year, the arbitration panel comes out with its own decision. Chevron won a huge victory. A three-judge arbitration panel at the International Chamber of Commerce London ruled that its takeover of Hess could go ahead.

10:12Jamie Smyth: Mike Wirth, Chevron CEO, was especially delighted with this result. Well, we're pleased with the decision that came out of the arbitration panel this morning. And this really helps create a premier international oil and gas company. So champagne corks are flying at Chevron. But there's a twist. Because now both Chevron and Exxon own stakes in what's one of the biggest oil finds in a generation. Meaning these old rivals have to work together in a big way. So what are the chances of that being a success? And where does this decision leave both companies in terms of their overall market dominance as the energy transition moves ahead?

11:25Thank you.

11:35Jamie, so Chevron is coming off this big triumph in July. It seems to have the wind under its sails a bit more. So what's next for Chevron's business? Are they now going to be in a position to overtake Exxon with this win?

11:50Jamie Smyth: Well, we've got to remember that Chevron really has gone through a rocky patch. You know, due to the fight over Hess, the temporary loss of its license to operate in Venezuela, and a loss of focus within its expiration arm. Right. And by Venezuela, you mean how in February of the Trump administration temporarily took away Chevron's license to operate in the country. Yes, that's exactly right, Michaela. We've also seen that oil prices are falling, which is hitting profits. And over a five-year time horizon, Exxon stock has outperformed Chevron. So there's really a need for Chevron to regroup at this minute.

12:29Jamie Smyth: Also, I think there's a personal element to this. You know, Mike Wirth, Chevron's CEO, he's likely to retire over the next couple of years. So I think he's really keen to build up Chevron, leave it in good shape for shareholders and employees and create a lasting legacy. And of course, you know, the bigger picture is the green transition has slowed, but it's unlikely that all of the existing oil majors will survive over the next 20 years. And Chevron really wants to be one of the last firm standing. And we heard how pleased Worth was about Chevron's recent success with Hess. But what about Worth's counterpart, Darren Woods at Exxon?

13:10How did he react to news of Chevron's win?

13:13Jamie Smyth: Exxon has a reputation throughout the oil industry of never backing down and being particularly litigious. It doesn't shy away from a fight and it goes to the courts quite often. And you can see that throughout its history. But I think what we did find out was that when the arbitration result came through, Darren Woods did ring Mike Worth to congratulate him on that. And I think that was the first sign of potentially a thawing in this relationship. Which that's good, right? I mean, seeing as how the companies are now going to be partners in the Staubach oil field. I think the relationship between these two CEOs is really key because they're going to be working together in Guyana in the world's most successful oil project.

14:00Jamie Smyth: So they're going to have to get along well. But what we've seen is a huge amount of tension. And it's going to be very interesting to see how this relationship develops over the next few years. In a sense, these companies do work together in several projects all across the world. And at an operational level, you're going to see the companies continuing to work well. The staff will continue to work well. Senior leaders will continue to work well. But what might be more difficult is if you're going to have, you know, new projects, new initiatives. And that often requires chief executives to get on well and to forge a good relationship.

14:41Jamie Smyth: So I think that's going to be key to watch. So beyond this Hess acquisition, what else is Chevron trying to do to get a leg up on Exxon right now? So last month at Chevron's results, Mike Wirth really outlined the plan to investors. His guiding philosophy has always been ruthless efficiency and shareholder returns. For Mike, who cut his teeth in the refining business at Chevron, it's not all about boosting volumes and glamorous M &A. So Chevron actually brought in outside consultants over the last couple of years to analyse its business. And in February, it announced pretty ruthless staff cuts of up to 20 % of the company's 40 ,000 workforce.

15:25Jamie Smyth: You know, it's trying to achieve$3 billion in cost savings by 2026. It's also moved its corporate headquarters from California to low-tax Houston. and it's outsourcing some engineering and other roles to low-cost centers, such as in India. You know, it really wants to be a leaner and meaner machine, according to senior management. You know, they want to be the best company for shareholders. In other words, they want shareholders to pick them over Exxon. You know, these portfolio managers, you know, they've got maybe enough money to put into one big US oil company and they want it to be Chevron.

16:06Jamie Smyth: and not their bitter rival Exxon. So that's what the competition is all about. So both Chevron and Exxon reported their quarterly earnings somewhat recently, which gave them both a chance to outline the latest in their strategies. So what do we know about what Exxon's trying to do right now to hold on to its top position? So right now, Exxon is increasing its capital expenditure and increasing its production quite significantly, despite low oil prices. This year, the super major plans to increase capital spending from 28 billion to between 28 and 33 billion over the period 2026 to 2030. In contrast, Chevron said it would cut capital spending this year as it's hunkering down and focusing on driving capital efficiencies and shareholder returns.

16:58Jamie Smyth: Now, the divergence strategy is most visible in the Permian Basin, which is the largest oil field in the U.S. Here, Exxon is planning to boost production to more than 2.3 million barrels of oil a day by 2030. In contrast, Chevron is cutting drilling rigs and frack crews in this basin and moving from a growth mode to a cash generation mode. Right. So Exxon doubling down on production over the next five years or so. So Chevron focusing more on efficiencies, it sounds. Now, we've touched on this a little bit, but there is this overarching long-term macro picture that's happening for the global oil industry over the next, you know, 5 to 15 years.

17:43Can you just describe what that is and how these two players are going to fit into that puzzle?

17:52Jamie Smyth: So demand for oil is still growing, but it's growing slower than people have expected. And most people would say that demand will peak possibly by the end of this decade, certainly in the 2030s. And then it will start to decline. You know, that's because the economy is going through a whole electrification trend. So you're beginning to see EVs take to the roads and we're seeing other moves where other industries are turning more to electricity rather than oil. So we're sort of getting a huge structural change in the economy and the energy industry. So the oil majors are trying to prepare for that.

18:39Jamie Smyth: We've currently got about six big Western oil majors. We've got Exxon, Chevron, ConocoPhillips, Shell, BP, and Total Energies from France. And most people think that there probably won't be six, 10 years from now. There's going to be consolidation within the industry as companies fight over the best assets and a dwindling number of assets to serve demand. I mean, maybe this is a crazy scenario to suggest, but what if Chevron and Exxon merged? Would that help them to survive this green transition that's coming for us in 2030, 2040? Despite their bitter rivalry over a century, there's always the chance that these two companies could come together.

19:33Jamie Smyth: I think it depends on world events. There were reports that during the COVID crisis five years ago, that there were discussions between both companies about a potential merger. Both companies have refused to confirm those talks, but it is certainly a possibility. And you can never discount these things, particularly when we enter a phase like we are now, where, you know, the oil market is going to be completely changed over the next two decades. We just don't know where it's going to go. So anything's possible. Jamie, thanks for coming on the show. Thank you very much. Really enjoyed it. Behind the Money is hosted by me, Michaela Tindera.

20:23This episode was produced by me, Safia Ethmed, and Manuela Saragosa. Sound design and mixing by Sam Giavinko. Original music is by Hannes Brown. Topher Forjas is the FT's acting co-head of audio. Thanks for listening. See you next week.

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