Oil majors beat analyst expectations but show lasting scars from crude’s downturn
ExxonMobil and Chevron, the two largest US oil groups, have reported earnings for the first quarter that show sharp improvements thanks to the rebound in oil and gas prices but also lasting effects from the financial pressure they were under during the downturn.
The two companies have adopted differing strategies in recent years, but each has found it difficult to find enough money to pay for both production growth and rising dividend payments. Both companies beat analysts’ expectations as they reported improved earnings for first quarter that were boosted by the oil and gas price rebound.
Exxon’s earnings per share more than doubled year on year to 95 cents, while Chevron swung into profit with earnings per share of $1.41 for the quarter, compared to a loss of 39 cents for the equivalent period of 2016. Chevron has been much more ambitious with its capital spending in recent years than Exxon.
That allowed the company to confirm it was on course for strong production growth this year, but for now it is having to use asset sales to help cover its capital spending and dividend payments. Pat Yarrington, Chevron’s chief financial officer, said on a call with analysts that the company was still aiming to be “cash balanced” — covering its dividends and capital spending from cash flows — in 2017.
By contrast, Exxon, which has been more conservative on investment, was hit by a continued decline in production. But it is able to cover its dividend payments and its capital spending from its operating cash flows, excluding asset sales.
In 2014 Chevron’s capital spending was greater than Exxon’s, even though Exxon’s market capitalisation was more than 80 per cent larger as it spent heavily on the giant Gordon and Wheatstone liquefied natural gas projects in Australia. Gorgon started up last year, and is now running at 85 per cent of nameplate capacity, and Wheatstone is due to start up around the middle of this year.
As those projects come into operation and ramp up output, Chevron’s production is rising, and the company reiterated on Friday that it was on course to meet its target for the full year of 4-9 per cent growth in production, excluding the impact of asset sales.
At Exxon, meanwhile, production volumes dropped by 4 per cent in the first quarter compared to the equivalent period of 2016, to 4.15m barrels of oil equivalent per day.
Most of that decrease was because of maintenance in Canada and Nigeria, and lower volumes coming to Exxon under production-sharing contracts with the countries where it operates, but even excluding those effects, volumes were down 1 per cent. Since the oil price started bouncing back from their lows last year, Chevron’s bolder strategy has found more favour with investors.
Its shares are up 18 per cent since January 2016, while Exxon’s are up 5 per cent. Now both companies are emphasising plans to step up investment in US shale oil and similar resources as ways to increase production.
Chevron has 12 rigs running in the Permian Basin of Texas and New Mexico, and expects to increase that to 20 by the end of next year. Its production in the Permian was 150,000 barrels of oil equivalent per day in the first quarter of 2017, up 33 per cent from the equivalent period of last year.
Exxon said it had raised the number of rigs it had working in US shale from 13 at the end of last year to 18 at the end of March. It is about to start drilling its first well in the large package of acreage in the Permian that it bought from the Bass family at the start of the year, and by the end of the year or in 2018 it expects to have 15 rigs running there.