By Bradley Olson and Selina Williams
It is looking like another lost year for the world's biggest oil
companies, as profits shrank dramatically during the second quarter
and they now face a volatile end to 2016 while crude prices veer
again to just over $41 a barrel.
Exxon Mobil Corp. on Friday reported its quarterly profit fell
60% to the lowest level since 1999, while Chevron Corp. disclosed
its biggest quarterly loss since 2001. The abysmal results capped a
bad week for big Western oil companies: BP PLC and Royal Dutch
Shell PLC earlier posted lousy earnings that disappointed
investors.
"The second-quarter results reflected lower oil prices and our
ongoing adjustment to a lower oil price world," said Chevron
Chairman and Chief Executive John Watson.
The companies performed substantially worse than the decline in
oil prices during the three-month period compared with a year
earlier. Now, oil is flirting with bear-market territory once again
as U.S. prices have fallen nearly 20% since hitting a 52-week high
of $51.23 on June 8. U.S. oil ended up 1.1% Friday at $41.60 a
barrel.
Fears of oversupply have gripped the market as a glut of
gasoline threatens to push prices lower just as the summer driving
season ends. That threatens to upend oil executives' expectations
that the market would begin to come into balance over the second
half of the year, stabilizing profits.
The dismal earnings news Friday pushed the market value of
Exxon, which for years reigned as the world's largest publicly
traded company, below that of Facebook Inc. and Amazon.com Inc. It
is now sixth on the global list behind five technology firms.
Exxon, Shell, Chevron, BP and French oil major Total SA in all
have cut spending by about $50 billion since 2013 and slashed tens
of thousands of jobs, but it hasn't been nearly enough to avert
trouble after oil prices began plunging. Exxon's net income fell to
$1.7 billion and Chevron reported a loss of $1.5 billion. Shell's
profit fell 93% to $239 million and BP reported a $2.25 billion
loss, its third straight.
All five companies have seen their debt soar as they continue to
burn though cash at an extraordinary rate. Since last year, they
have failed to generate enough cash to pay dividends and invest in
new production. That shortfall is on a pace to exceed $90 billion
by the end of the year.
Margins have fallen precipitously in the refining business,
which until recently had been the lifeline propping up the
companies' bottom lines as most lost money producing oil and
gas.
The results -- and the roller-coaster market for crude -- have
led executives, investors and analysts to face the sobering reality
that a recovery looks to be unpredictable, and arduously slow.
"The road ahead is going to be a tough one for the majors," said
Gianna Bern, an associate professor of finance at the University of
Notre Dame who has advised big oil companies. "The mantra has been
to cut spending, reduce head count and wait for higher prices, but
it doesn't look like those are coming any time soon."
Big oil companies have seen a selloff in shares this week as the
extent of their losses became public.
Exxon was down 1.9% to $88.50 on Friday. Chevron fell about 3%
in the past week to $101.60. BP's American depositary receipts fell
3% to $34.33 and Shell's fell 4.4% to $51.59.
Energy executives have sought to reassure shareholders, saying
that prices eventually will rebound. Shell CEO Ben van Beurden said
he believed the market would come back into balance in the second
half of the year.
Similar predictions last year were dashed when prices dipped
again after a modest rebound. Billionaire U.S. drilling pioneer
Harold Hamm and executives at EOG Resources Inc., the biggest shale
producer, both predicted that prices would rebound in the second
half of 2015.
Instead, they fell until they hit a 13-year low in January of
$27 a barrel.
Many oil and gas companies have promised to "live within cash
flow" by next year, assuring investors that they will be able to
generate enough money to pay for new projects and dividends without
additional borrowing.
Total said it would need oil prices at $60 a barrel to reach
that mark, while BP Chief Executive Bob Dudley said the company
would be able to do so in 2017 if oil prices are between $50 and
$55 a barrel.
So far this year, oil has sold for an average of about $40 a
barrel.
"We're not counting on a recovery in oil prices," Mr. Dudley
said in an interview. "Oil companies made money at $20 a barrel in
the past, so if we're going to stay lower, the whole industry would
rebase itself."
That goal may be more elusive than investors realize. In 2013,
when global oil prices averaged about $109 a barrel, the five
companies all failed to generate enough cash to meet spending
commitments and dividend payments. The shortfall was $41 billion,
according to a Wall Street Journal analysis.
For much of the past month, Brent crude prices have been trading
well below $50 as a gasoline glut has undermined the recovery seen
in the second quarter. Prompted by last year's strong profit
margins in refining, most companies took advantage by ramping up
output, which has heightened oversupply fears.
Earlier this week, BP said its profit margins at its refineries
fell to their lowest levels since 2010. Total blamed its lower
earnings on deteriorating revenues from its refineries and
petrochemical plants. Exxon and Chevron saw such profits fall by
almost half.
The decline in refining margins is largely due to oversupply,
said Jeff Woodbury, Exxon's vice president of investor relations,
in a call with investors Friday.
"Demand is growing, but the issue that we're all faced with
right now are very large inventories of products," he said. "Either
the demand has got to grow or the supply's got to shrink."
Some energy experts played down the carnage, saying big oil
firms remain strong bets to bounce back over the long run.
"The difficult times are all a function of the low price, and
while they still remain low, they will come back eventually," said
Ed Hirs, a lecturer on energy economics at the University of
Houston who runs a small oil and gas production firm. "This is
probably the last quarter that we'll see the big oil companies
trying to clean up their balance sheets."
--Anne Steele contributed to this article.
Write to Bradley Olson at Bradley.Olson@wsj.com and Selina
Williams at selina.williams@wsj.com
(END) Dow Jones Newswires
July 29, 2016 15:06 ET (19:06 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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