(The opinions expressed here are those of the author, a

columnist for Reuters)

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Exxon, Chevron ( CVX ) oil and gas production hit record in Q2

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Shell production drops to lowest in at least 20 years,

BP's

drops from year ago

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European majors hope to close a valuation gap with US

rivals

By Ron Bousso

LONDON, Aug 5 - When playing catch up, picking up the

pace may not be enough. One also has to hope rivals don't

accelerate. Just ask Europe's energy majors.

Exxon Mobil ( XOM ) and Chevron's ( CVX ) bumper oil and gas

output in the second quarter served as a sobering reminder to

their European rivals of the ferocious challenge the latter face

in their attempts to close the production gap that has expanded

in recent years.

Exxon pumped 4.63 million barrels of oil and gas equivalent

per day (boed) in the second quarter, up by 6% from a year ago

and a record for the period, following last year's $60 billion

acquisition of Pioneer Natural Resources and rising output from

low-cost operations in the Permian shale basin in the United

States and offshore Guyana.

The Texas-headquartered company is targeting between $27 and

$29 billion in capital expenditures this year and aims to

increase output to 5.4 million boed by 2030. And CEO Darren

Woods signalled the company was willing to make further upstream

acquisitions.

Smaller rival Chevron ( CVX ) also posted its highest-ever quarterly

production of 3.4 million boed, up 3% on the year, on the back

of rising output in the Permian and in Kazakhstan. Output is set

to rise by up to 500,000 boed in the third quarter after Chevron ( CVX )

completed the acquisition of Hess earlier this month, following

a lengthy, bitter legal battle with Exxon.

The story is quite different in Europe.

Shell's production dropped 4.2% to 2.65 million

boed, the lowest in at least 20 years, reflecting recent asset

sales and the British energy company's lower spending on oil and

gas exploration earlier this decade, in its efforts to shift

away from fossil fuels.

At BP, production suffered a 3.3% annual decline to

2.3 million boed, also due to lower investment in recent years.

And while France's TotalEnergies grew production by

3.6% from a year ago, its output of 2.5 million boed is still

well behind that of its U.S. rivals.

Worryingly for these European giants, the window of

opportunity to grow output meaningfully is narrowing in this

capital-intensive industry, where it takes years to develop

projects, competition from rising OPEC supplies is intensifying

and the longer-term outlook for oil demand remains hazy amid the

energy transition.

MODEST GROWTH

The European trio's oil and gas production targets are also

rather modest compared with Exxon and Chevron's ( CVX ) aggressive

strategies.

TotalEnergies - which has maintained the most consistent

strategy among the three - aims to increase output by 3% on an

annual basis between 2024 and 2030. BP last year abandoned a

target to sharply reduce output by the end of the decade and now

aims to keep production roughly stable at 2.3 to 2.5 million

bpd. Shell aims to grow oil and gas production by 1% annually

into 2030.

Shell aims to hold upstream and integrated gas capital

spending flat between 2022 and 2028 at $12-$14 billion per year.

The company plans to start up around five upstream projects by

2027, but it has relatively limited reserves to sustain and grow

its production over the long-term, meaning it will likely seek

to acquire assets or another company.

BP, which has been in deep turmoil following a leadership

and strategy crisis which began in 2023, has plans for several

new upstream projects in the coming years, including in Iraq and

a complex development in the Kaskida field in the Gulf of

Mexico.

And the UK group announced on Monday that it had made its

biggest oil discovery in 25 years in the Bumerangue block in

offshore Brazil. If the discovery holds significant commercial

volumes, it could certainly offer the company meaningful

financial uplift, but once again, development would take years

and billions of dollars.

VALUE AND VOLUME

Of course, larger oil and gas volumes do not necessarily

equal stronger shareholder returns, but upstream operations have

long been the core driver of profits - and this continues to be

reflected in valuations today.

Exxon's price-to-cash flow ratio, a key valuation metric, of

8.2 compares with Chevron's ( CVX ) 7.7, which both far exceed Shell's

5.1, TotalEnergies' 4.6 and BP's 3.6, according to LSEG data.

Importantly, the energy sector as a whole is fighting for a

smaller pool of capital. It accounts for less than 5% of the S&P

500 index, down from a peak of 16% in 2008, reflecting years of

weak returns, massive energy price volatility and growing

environmental pressures.

Given this backdrop, Europe's energy majors have been

focused on driving down costs and improving operations, while

moderately growing upstream production following years of lower

investment when they rolled out energy transition strategies

between the late 2010s and 2023.

But these new strategies to attract a shrinking pool of

investment capital may be too little too late, because even if

the Europeans speed up production, Exxon and Chevron ( CVX ) won't be

standing still.

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(Editing by Alison Williams)