Capital Allocation and Corporate Strategy: An Examination of the Oil & Gas Majors

The authors present the findings of their study of the capital spending and cash distributions of the five largest publicly traded integrated oil and gas companies (ExxonMobil, Chevron, BP, Shell, and Total) over the past two decades. Deploying capital in the execution of strategy and achieving the proper balance between reinvesting in the business and returning capital to shareholders is particularly challenging in one of the world’s most capital intensive industries. The practices of the five companies differed markedly despite similarities in business lines and international operations.

The study explores the different periods of industry growth and performance between 1998 and 2018, when the industry went through an extended period of stable growth (1998-2008), followed by an extended period of stagnant growth in reserves and production despite extensive spending on capital expenditures. A key finding is that despite spending more than $1.8 trillion over the 20-year period, the five supermajors were unable to expand production. The authors found that what little growth did occur was the result of acquisitions.

Capital allocation decisions by the five majors differed markedly in their cash returns to shareholders. Although all five firms maintained their commitments to shareholder dividends, ExxonMobil deployed massive and continued allocations of capital to share repurchases. Both dividends and share repurchases had mixed results in supporting corporate share prices.

The authors attribute the difficulty the majors had in generating profitable growth partly to the inherent challenges of a depleting industry and partly to the selection of capital investments—their timing and cycle length. The historical experience of the majors in dealing with large oil price cycles drove all five to maintain capital expenditures in the post-2008 financial crisis period. Only when oil prices plunged in 2014 did the majors conclude that the decline was a transformative shift requiring a reconsideration of capital allocation and capital expenditures. The study notes that acquisitions, particularly ExxonMobil’s acquisition of XTO, depressed market values despite some of the highest share repurchasing levels across U.S. industry.