(FROM THE WALL STREET JOURNAL 8/1/15)
By Daniel Gilbert
America's two biggest oil companies, Exxon Mobil Corp. and
Chevron Corp., reported their worst profits from pumping oil and
natural gas in more than a decade as low crude prices lopped off
billions of dollars from their quarterly haul.
Exxon's second-quarter profit plunged 52% to $4.2 billion. The
energy giant's division that pumps oil and gas accounted for just
$2 billion of that, the lowest level since 2002. Chevron eked out a
quarterly profit of $571 million thanks to its fuel-making
refineries, which made up for the company's $2.2 billion loss from
pumping oil and gas -- the first such loss in nearly 20 years.
Chevron lowered its outlook for crude prices and wrote down the
value of its energy holdings by $2 billion.
The hard landing fell short of analysts' expectations, and Exxon
and Chevron shares dropped nearly 5% Friday, making them the two
worst performers in the Dow Jones Industrial Average.
Global oil prices have fallen more than 50% since last June, and
settled Friday at $52 a barrel, the lowest since January. Exxon and
Chevron have posted bigger profits during the 2009 downturn and
earlier oil busts. But the world's biggest oil companies are ailing
from more than low prices -- problems that were masked when oil
traded around $100 a barrel.
"The tide's going out and now we can see what was at the
bottom," said Amy Myers Jaffe, executive director of energy and
sustainability at the University of California-Davis.
The cost of unleashing new supplies of oil and gas has soared
for the world's biggest oil companies, as they have spent enormous
sums to harvest natural gas from Australia's remote waters and
wring crude from Canada's oil sands, Ms. Jaffe noted.
Chevron is preparing to start up a massive gas-exporting project
in Australia, whose costs have ballooned 45% to $54 billion. Exxon
has boosted its oil output by scooping up thick, sludge-like crude
from mines in the forests of Western Canada, a fuel that is
expensive to unearth and sells for less than traditional oil. Royal
Dutch Shell PLC on Thursday began wildcatting for oil in Alaska's
Arctic waters, an undertaking that has already cost it more than $7
billion and it could take another decade before any oil flows.
As crude prices have tumbled over the past year, the three
behemoths have been spending more to coax fuel from the ground and
on dividends to shareholders than they have generated in cash. The
companies are trying to conserve cash by laying off workers,
negotiating for discounts with their suppliers and cutting
spending.
Exxon plans to spend half as much on buying back its stock
during the third quarter. Shell said this week it will cut 6,500
workers from its world-wide payroll. Chevron is reducing its
workforce by 1,500, and didn't raise the dividend for the second
quarter, as it typically does. Patricia Yarrington, Chevron's chief
financial officer, said the company is committed to extending its
streak of annual dividend increases for 27 years. "It is our number
one priority," she said.
The companies are also seizing savings amid the downturn,
particularly in the U.S. Jay Johnson, a Chevron executive vice
president, said the company had been able to bring down the cost of
tapping oil and gas by 20% to 50%, making it profitable to drill
some new prospects even at today's oil prices. Exxon has operated
at a lower cost on U.S. soil over the last three years than many
smaller drillers, said Jeff Woodbury, head of investor relations.
But both companies reported losses from their U.S. oil-and-gas
drilling operations through the first half of the year, as have
rivals BP PLC and ConocoPhillips.
The oil giants typically weather energy downturns because of
their countercyclical businesses. When oil prices are high, they
make richer profits from pumping crude out of the ground. When
prices are low, they make more money from refining inexpensive
crude into fuels like gasoline and diesel that they can sell at a
greater profit.
Until this year, Exxon and Chevron typically made the vast
majority of their profits from oil and gas production. Refining
operations and chemical-making units have accounted for less than a
quarter of Exxon's profits and barely 10% of Chevron's over the
last 10 years. This year, however, is a different story.
Exxon made more money from refining crude and selling chemicals
in the second quarter than it did from producing oil and gas -- the
first time since at least 2000. Chevron turned a $3 billion profit
from its fuel-making plants, boosted by selling a stake in an
Australia refiner, which accounted for the lion's share of its
profits.
"I think they're largely benefiting from the integrated model,"
said Allen Good, a Morningstar Inc. analyst. Still, he said, they
are spending more to generate cash than they used to.
Meanwhile, the price of crude continues to crater and many
analysts don't see a rebound on the horizon.
IHS Energy, a research and consulting group, said the global oil
glut is intensifying because the U.S., Saudi Arabia and Iraq have
increased their collective output by 2 million barrels a day since
November. Prices are poised to drop even further and could linger
in a low $40-range for months before growing oil supplies stop
swelling, according to a new report.
"Oil prices will be under downward pressure until there is
evidence the glut is shrinking," IHS analysts wrote. "This will not
happen quickly unless prices fall even further from recent
levels."
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