Energy stocks have sold off over the past week, pulled down by both the broader financial turmoil and some poor earnings figures from top oil companies.
As of Thursday, benchmark oil prices are off more than 7 percent from their cyclical peaks reached a little more than a week earlier. The spike in volatility and the global financial selloff magnified the damage to the energy sector.
But some highly disappointing numbers from a few oil majors made things worse. ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) , in particular, spooked investors when they revealed fourth-quarter earnings that badly missed expectations. Chevron earned $0.72 per share in the fourth quarter and Exxon reported earnings of $0.88 per share, figures that were 40 percent and 15 percent lower than analysts’ expectations, respectively.
The disappointing numbers were, in part, the result of a slump in refining margins. During the depths of the oil market downturn, the downstream units for the integrated oil companies cushioned the blow of plunging oil prices. But with the market on the upswing, rising profits from crude oil sales are now being offset by a narrowing of refining margins.
Average refining margins from around the world dipped from $16.30 per barrel to $14.40 per barrel between the third and fourth quarters last year, according to data from BP. In the first quarter of 2018 to date, margins fell even further to $12.10 per barrel.
But for Exxon, at least, the trouble wasn’t all related to its downstream operations. Its upstream unit actually would have lost money if not for the U.S. tax overhaul. Free cash flow was negative in the fourth quarter, although Exxon’s leadership says that is because of one-off expenditures, such as a sizable acquisition in Mozambique. “All of these are key elements of our future growth potential,” Jeff Woodbury, a VP at Exxon, told shareholders on a conference call.
ExxonMobil’s production has been slowly eroding for years, and it dipped by 130,000 bpd in the fourth quarter from a year earlier.
Some analysts see the numbers as a red flag. “One way to put these earnings in perspective: Exxon is depending on rising global prices to earn a profit while having increasing difficulty in translating higher oil prices into higher profits,” Tom Sanzillo and Kathy Hipple of the Institute for Energy Economics and Financial Analysis, wrote in a commentary. “For long-term investors, this was Exxon’s 12th consecutive quarterly loss in its U.S. drilling business.”
But the oil major is aiming to turn things around by ramping up production in U.S. shale, while also prioritizing the development of several large discoveries off the coast of Guyana. Meanwhile, ExxonMobil recently announced plans to spend $50 billion on U.S. shale over the next five years. By 2025, the oil major says it will quadruple its shale production to around 800,000 bpd, three quarters of which will come from the Permian.
Still, investors were not impressed. Exxon’s share price has lost about 15 percent in less than a week. Barclays issued a double downgrade for the oil major’s shares, from Overweight to Underweight. For its part, Chevron has seen its stock fall about 8 percent in the same timeframe, and it is also down 12 percent since January.
Not all of the oil majors did poorly. Total SA announced a 28 percent increase in net profit, driven by higher production, cost savings and higher oil prices. The French oil giant says it will increase its dividend by 10 percent over the next three years as a result of its strong financial position.
The company will also buyback $5 billion worth of shares over the next three years. “The numbers were good. In Total’s case, they’ve got enough cash to increase capex and do a share buyback, so it all looks reasonably positive,” said Clairinvest fund manager Ion-Marc Valahu, according to Reuters.
Royal Dutch Shell (NYSE" RDS.A) and BP (NYSE: BP) also posted some decent results, both reporting profit that more than doubled between 2016 and 2017.
Moreover, there is a group of large oil companies that are now in a place where they can cut costs and rake in cash, having completed a series of large-scale projects in recent years. Royal Dutch Shell, BP and Total all grew heavily in recent years, and are now looking to cash in on those investments. For them, things are on the upswing.
But after several months of intense optimism amid rising oil prices, the bullish sentiment has suddenly come to an end. Oil prices are sharply down from their recent peaks, and there is no guarantee they will quickly rebound.
By Nick Cunningham of Oilprice.com