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Why Exxon and Chevron’s Deals Leave Investors Cold

U.S. oil majors Exxon Mobil and Chevron are good at squeezing hydrocarbons out of the ground. The companies have tried hard to be attractive, first by continuously demonstrating spending discipline and consistently doling out generous shareholder returns. Most recently, both announced mega acquisitions at reasonable prices. Exxon just acquired some of the best acreage in the prolific Permian Basin, paying a 9% premium on Pioneer Natural Resources’ 30-day volume-weighted average price as of Oct. 5. Chevron, meanwhile, added some valuable Guyana exposure, paying a 10.3% premium on Hess’s 20-day average price on Oct 20. Exxon announced a 4% dividend increase—more generous than last year’s hike of 3%. Both are still generating a lot of free cash flow and returning a good amount of it to shareholders: Exxon and Chevron have paid out $24 billion and $20 billion, respectively, in dividends and buybacks year to date. Exxon said its energy-products segment was negatively affected by unfavorable timing of its hedges, which will unwind over time. Its chemicals segment, meanwhile, succumbed to compressed industry margins. Chevron reported worse-than-expected international downstream results, which were affected by lower margins on refined-product sales and lower refinery runs because of planned shutdowns. Investors have expressed doubts about Exxon’s claim that it can produce more out of its and Pioneer’s combined acreage than the companies would have individually, all while reducing costs. In the earnings call on Friday, Exxon gave more color, saying that its method—known as cube development—delivers similar recovery on its own acreage as Pioneer’s, even though Pioneer acreage is higher quality. Cube development allows Exxon to drill multiple horizontal wells in stacked intervals from a single surface location—a method that helps maximize recovery while reducing costs. Chevron said that the project is expected to cost between 3% and 5% more than the initial plan. Chief Executive Mike Wirth said that the project has had unique issues and that remaining projects in its pipeline are less complex.

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