- Cost-cutting allows groups to live with $50 crude
Sharply increased profits from ExxonMobil and Chevron added to signs that the world’s biggest oil and gas companies are gradually recovering from the deep downturn of the past three years.
ExxonMobil nearly doubled its earnings in the second quarter compared with the same period last year, while Chevron returned to the black after losses a year ago. Eni of Italy also reported higher profits on Friday, a day after strong results from several other large European groups, including Royal Dutch Shell and Total.
Lydia Rainforth, analyst at Barclays, said the earnings offered reassurance to oil investors that “the sector works at $50 per barrel”, referring the level around which crude prices have yo-yo-ed this year. All the oil majors to have reported this week generated enough cash to cover their dividends and pay down debt.
That represents a turnround from the past two years, when most of them piled on debt to maintain their payouts to shareholders. Oil companies have been battling to reduce costs and increase efficiency since prices crashed from above $100 per barrel three years ago.
Capital expenditure by both ExxonMobil and Chevron was about a quarter lower than in the second quarter of 2016.
Darren Woods, who succeeded US secretary of state Rex Tillerson in January as chief executive of ExxonMobil, faces a tricky balancing act as he seeks to assuage investor concerns over the group’s sluggish growth prospects while maintaining capital discipline. Billions of dollars have been committed to development of ExxonMobil’s giant Liza oil discovery off the coast Guyana, and the group is also expanding its presence in the prolific shale oil resources of the Permian Basin in Texas and New Mexico.
However, capital expenditure reached just $8.1bn in the first half of the year, well short of halfway to towards the full-year guidance of $22bn, showing that spending remains under tight control. ExxonMobil’s earnings of $3.35bn, or 78 cents a share, fell below the average 84 cents forecast by analysts, causing the stock to drop more than 2 per cent on Friday morning in New York.
Chevron’s $1.5bn profit — compared with a $1.5bn loss a year ago — was better received by Wall Street. Adjusted for exceptional items, earnings of 91 cents per share beat consensus expectations for 81 cents, pushing the stock up 1.7 per cent. Eni also exceeded expectations with adjusted net profits of €463m, compared with a loss of €317m last year.
The Italian group has earned a reputation as the industry’s most successful explorer after big discoveries from Egypt and Angola to Mozambique and Mexico in recent years, at a time when most global majors have reined in their activity. The Italian group has offset the cost of development with a series of multibillion-dollar stake sales and driven down the cost and time it takes to bring projects on stream.
Alastair Syme, analyst at Citi, said Eni “offers a Big Oil business model that can compete pretty well in a world dominated by low-cost shale growth”. European majors are on course for an average cash flow break-even point — the oil price needed to cover dividends and capital expenditure — below $50 per barrel this year, according to Barclays.
Shell has reduced its break-even point by 60 per cent from $120 per barrel in 2013 to $47 this year. Ms Rainforth said this should increase investor confidence that, not only is Shell’s prized dividend secure, but that it will also be able to buy back $25bn of shares between 2018 and 2020 with oil prices around $50-55 per barrel. Additional reporting by James Politi in Rome