November 11, 2019

Earnings Roundup: U.S. Oil Majors

by Tajinder Dhillon.

U.S. oil companies finished reporting 19Q3 earnings, posting a significant overall decline in YoY growth.  Notables including Exxon, Chevron, and Occidental experienced a decline of 54.1%, 26.5%, and 93.8% in YoY earnings.  Top-line revenue also declined 15.1%, 17.9%, and 4.9% respectively.

Aggregate YoY earnings growth dropped 49.2%, while aggregate revenue declined 14.3%.

Exhibit 1 highlights aggregated results for the S&P 500 Integrated Oil & Gas and Oil & Gas Exploration & Production sub-industries.

Exhibit 1: 19Q3 Results for S&P 500 Energy E&P

Decline in commodity prices

It was expected to be a difficult quarter for the energy sector coming into earnings season, as 18Q3 earnings growth was an impressive 114.2%, while revenue growth was 20.4%.  This set a tougher year-over-year benchmark to beat.

To make matters more challenging, a drop-in oil and gas prices compounded the impact of 19Q3 earnings results.

Neil Hansen, VP of Exxon Mobil Investor Relations states “the broader margin environment remained challenging as short-term supply and demand imbalances continue to pressure natural gas prices and industry chemical and lube-based stock margins… upstream earnings declined by approximately $1.1 billion, driven by lower liquids realizations.”

The decline in oil process has been well-documented and Exhibit 2 paints a clear picture which shows the quarterly average price of West Texas Intermediate (WTI).  WTI settled at a quarterly average price of $56.36 per barrel in 19Q3, compared to $69.69 in 18Q3, resulting in a decline of 19.1% YoY.

Exhibit 2: Price of West Texas Intermediate (WTI)

Looking ahead, the YoY decline in WTI for 19Q4 currently sits at 7.5%.  If the outlook for oil prices improve through the end of the year, 19Q4 earnings may be less impacted by current oil prices.

Focus on Permian Basin

While oil prices have declined, a consistent theme around the big three (Exxon, Chevron, Occidental) remains: higher liquids production.

Hansen highlights the strong production growth at Exxon. “Production in the third quarter was 3.9 million oil equivalent barrels per day, an increase of 113,000 oil equivalent barrels per day relative to the third quarter of last year, representing a 3% increase. The higher volumes were driven by growth of 123,000 oil equivalent barrels per day in the Permian, representing a 72% increase from the prior year quarter.”

Exxon is on target to reach 2019 production of 4 million barrels of oil equivalent (BOE) per day.  Analysts polled by Refinitiv forecast 19Q4 total production per day (BOE) at 4.06 million barrels.  BOE is an industry figure which combines oil, natural gas, and LNG production into a normalized figure.

As the Permian Basin is the crown jewel of U.S. oil production, Exxon is doubling-down in the region. “We’ve made final investment decisions this year for 4 additional projects, including the Beaumont light crude expansion and Wink to Webster Pipeline, both of which will support our integrated Permian strategy and growth plans.”

Exxon has also provided positive guidance for 19Q4 production, highlighting an increase in seasonal gas demand.  “Fourth quarter gas demand has been, on average, 150,000 oil equivalent barrels per day higher than the third quarter, and we expect a similar trend to occur this year.”

Chevron also reported higher production in the Permian.  James Johnson, EVP of Upstream highlights “third quarter oil-equivalent production increased 3% compared to a year ago with higher shale and tight production in the Permian as well as higher production from major capital projects following the ramp-ups at Big Foot and Hebron.”

Chevron also reported positive guidance for 19Q4 production. “Looking forward to the fourth quarter, we expect production growth to be primarily driven by our shale and tight assets as well as the continued ramp-up of Hebron.”

Finally, Occidental joined its peers by stating, “2020 production growth on the company level will be driven by Permian Resources, while we expect production from other areas to be flat or grow at a reduced rate compared to 2019. We expect Permian Resources production to grow by approximately 5% in 2020, operating 15 gross rigs and 8 net rigs.” (Vicki Hollub, CEO).

According to data from I/B/E/S by Refinitiv, aggregate 19Q4 total production per day (BOE) is expected to increase 9.1% YoY for the S&P 500 Integrated Oil & Gas sub-industry.

Looking ahead to IMO 2020

Exxon provided valuable commentary on its plans to take advantage of new regulations coming into effect January 1st, 2020.  IMO 2020 is a regulation that will require sulfur contents in marine fuel to be no higher than 0.5%, compared to the previous limit of 3.5%.  Marine fuel, known as ‘bunker fuel’, is a heavy sour crude.  After the regulation comes into effect, the shipping industry will have to move to a lighter oil blend containing lower sulfur contents.

As a result, the spread between light and heavy oil is expected to continue and widen. Lower demand of heavy fuel has already impacted bunker prices.

Hansen states, “the spread is expanding with the forward curve and third-party estimate ranges showing further widening, which will favor more complex refiners with the capacity to upgrade heavier sour crudes to cleaner products.”

Complex refineries are those who can use heavy crude oil and upgrade it to lighter oil refined products including gasoline and diesel.  Margins are expected to increase for complex refineries who can purchase cheaper heavy oil, the key input to a refinery, and transform it into more expensive lighter products.  Exxon mentioned in their earnings call that for every dollar per barrel change in the light/heavy spread, downstream annual earnings will increase by approximately $150 million.

Exxon has industry-leading coking capacity, a critical process that transforms heavy oil into lighter products, including ultra-low sulfur diesel (ULSD).  ULSD is expected to be the primary source of fuel used by the shipping industry post IMO 2020.

“We recently strengthened with the start-up of the Antwerp coker. This new facility upgrades bunker fuel oil currently produced in our Northern European refineries to higher-value products, including ultra-low sulfur diesel.”

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