The latest round of earnings numbers from the oil majors reveal extensive damage, with many of them reporting some of their worst results in years.
The poor performances are hardly surprising. The first quarter of 2016 saw oil prices dip as low as $26 per barrel, and WTI and Brent only averaged about $33 per barrel for the three-month period. Oil prices have collapsed since mid-2014, but the first quarter of 2016 was the most painful to date.
However, several of the largest publicly-traded oil companies beat market expectations, posting better quarterly results than many expected given the horrific market conditions.
Big oil, small profits
BP started things off on April 26, reporting a 79 percent decline in earnings, with a cost-profit (similar to net-profit) of $530 million. However, when including $917 million in pre-tax charges related to the 2010 Deepwater Horizon disaster, BP actually posted a loss of around $485 million. That compares negatively to the $2.6 billion profit BP recorded in the first quarter of 2015. The British oil giant saw its net debt levels rise to $30 billion in the first quarter, up sharply from $25.1 billion a year earlier.
Over the course of the week more numbers trickled in:
- Chevron reported a first quarter loss of $725 million, a plunge from the $2.6 billion net profit it posted in the first quarter of 2015.
- ConocoPhillips swung to $1.5 billion loss in the first quarter, down from a modest profit of $272 million in the first three months of last year. The company announced more capex cuts, reducing its spending guidance for 2016 from $6.4 billion to $5.7 billion.
- Italian oil giant Eni reported a net loss of 792 million euros for the first quarter, or about USD$900 million. A year ago it earned a profit of 832 million euros.
- ExxonMobil reported its worst result since 1999, earning just $1.8 billion for the quarter, down from $4.9 billion a year ago. Exxon’s full-year earnings could stay below $10 billion for the first time since it acquired Mobil 17 years ago.
- French oil giant Total reported much more impressive numbers. It earned $1.6 billion in the first quarter, still down 37 percent year-on-year, but better than most analysts expected.
Downstream offsets upstream for oil majors
Many of the oil majors had one thing in common: Low oil prices are hollowing out their upstream profits, but as integrated companies, their downstream earnings offset some of those losses.
- BP lost $750 million from upstream, but earned $1.8 billion from downstream operations
- Exxon lost $76 million from upstream operations, but its downstream unit earned $906 million
- Chevron lost $1.4 billion from its upstream operations (-$850 million in the U.S., and -$609 million internationally), but its downstream unit earned $735 million.
- Total earned a modest profit of $498 million from its upstream unit, and $1.1 billion from downstream operations
The quarterly results were some of the worst in years, but on the whole, much better than analysts had predicted. BP’s share price shot up more than 6 percent after it reported abysmal, but better-than-expected figures for the quarter. Exxon’s worst result since the end of the 20th century still beat analysts’ estimates—the markets expected earnings of 28 cents per share but Exxon had net income of 43 cents per share. Exxon’s share price jumped 1 percent on the news, although those gains fell back over the course of the trading day on April 29.
Second quarter should be better
Looking forward, there are several positives working in the favor of the oil majors, which could mean that the worst is over. First and foremost is the recent rise in oil prices. WTI and Brent are up about 75 percent since dropping below $30 per barrel in February. Higher oil prices will bring revenues back up.
Second, refining margins are starting to improve. Downstream units have insulated the integrated companies from much worse losses, but margins were actually down in the first quarter relative to 2015. More recently, however, refining margins have also improved on strong gasoline demand. That could provide a further lift to downstream operations in the second quarter.
Finally, the majors have cut spending significantly and are seeing some large projects planned years ago start to come online. For instance, Eni saw production rise on the startup of its Goliat oilfield, a project in the Norwegian Arctic.
Additionally, Chevron finished up the $54 billion Gorgon LNG project earlier this year, a gargantuan project that has sucked up a lot of its cash flow. The LNG export facility in Australia hit some roadblocks with some technical problems, knocking it offline for a few months, but with the major spending out of the way, Chevron is confident that its cash flow situation is set to improve significantly—both by reducing capex and by bringing new sources of revenue online.
“We announced first LNG production and first cargo shipment from Train 1 at the Gorgon Project in March. Production from the Angola LNG plant is imminent and a cargo shipment is expected in May. Earlier in the year, we started up production at the Chuandongbei Project in China, and we continue to ramp up production in the Permian Basin and elsewhere,” Chevron’s CEO John Watson said in a statement. “Our capital spending is coming down. We are moving our focus to high-return, shorter-cycle projects and pacing longer-cycle investments.”
The oil majors may be able to turn things around from the first quarter, but that does not necessarily mean they will be on sound financial footing.
If oil prices do not rebound substantially, the oil majors will not be able to keep up such high levels of spending and still offer shareholders such generous dividends.
Many of them are still not able to cover their dividends with cash flows, and have to borrow to sustain the payouts. S&P stripped ExxonMobil of its AAA credit rating on April 26, which it has held since the 1930s. Only Microsoft and Johnson & Johnson remain as the two AAA credit rating holders in the United States. S&P raised concerns surrounding ExxonMobil’s elevated spending levels, a pile of debt that has tripled since 2012, and its generous dividend payout. Exxon shrugged off the downgrade and raised its dividend the following day by 2 cents per share, marking 25 consecutive years of dividend increases.
If oil prices do not rebound substantially, the oil majors will not be able to keep up such high levels of spending and still offer shareholders such generous dividends. ConocoPhillips and Eni have already succumbed to this reality, cutting their shareholder payouts to improve cash flow. On April 28, ConocoPhillips’ chief executive Ryan Lance said that the company would not “grow for growth’s sake,” and would instead make trimming its debt burden a top priority. “The way to win in a cyclical business is to have a low cost of supply portfolio and to be the most resilient when prices are low and the most disciplined when prices are high,” Lance said.
Jeff Currie, the global head of commodities research at Goldman Sachs, says the other oil majors will have to cut their dividends eventually as well. “A lot of these dividends were put in place when oil prices were $110, $120 a barrel,” Currie said on CNBC. “Obviously if we stay in a $50-to-$60-type price environment most of these companies have embedded in their outlooks, it’s going to be very difficult to actually make those types of dividend payments that were structured in the previous era.”