Exxon, Chevron Earnings Point to Industry Recovery -- WSJ
The world's biggest oil companies are seeing their highest profits in more than a year, an early signal that they may be turning a corner on their long path to recovery.
Exxon Mobil Corp. on Friday reported its best quarter since 2015, more than doubling profit from the first three months of 2016 when crude prices fell to the lowest level in more than a decade. The company also generated enough cash to pay for new investments and dividends, an increasingly important measure of resilience for big oil companies, which have been piling on debt.
Chevron Corp., which reported a quarterly loss last year, on Friday posted a profit of $2.7 billion. The rosy results came a day after French energy company Total SA reported a 77% rise. Royal Dutch Shell PLC and BP PLC, which will report next week, are expected to show sharp increases.
The improvements are the latest in a winning run of first-quarter earnings this month for large companies, including Google parent Alphabet Inc., which reported a 29% jump in profit Thursday; and General Motors Co., which on Friday reported a 34% increase, thanks in part to strong U.S. sales of pickup trucks and sport-utility vehicles. Financial companies also generally had strong quarters including Bank of America Corp., which earlier posted a 40% profit increase.
For the big oil companies, the gains reflect a rally in oil prices from last year's lows, and revenue from new projects that have come online after years of multibillion-dollar investments in far-flung places including Angola, Qatar, Australia, Canada and Russia.
They also highlight severe belt tightening by companies that have been retooling strategies as they brace for a potentially extended period of challenging oil prices.
"These companies are cutting their cost structures," said Brian Youngberg, an energy analyst at Edward Jones. "They are leaner and have managed to get more out of each dollar they spend, and it is showing in their results."
Earnings growth for oil-and-gas companies could have hit double digits in the first quarter of 2017, said Joseph Tanious, senior investment strategist for Bessemer Trust. "When oil prices were dipping lower, that was having a drag on the overall results for the S&P 500," he said. "Now we're seeing the opposite of that."
In the U.S., companies also face the prospect of less burdensome regulations under President Donald Trump, who signed an executive order on Friday to ease restrictions on offshore drilling. That order, however, is expected to have limited immediate impact, experts said, because current prices still make drilling in the Arctic Ocean and other affected areas economically unattractive.
Still, major oil companies face significant challenges as they attempt to repair the damage done by the worst price crash in a generation. Among the five largest Western energy giants, net debt more than tripled in the past five years to about $214 billion as they borrowed to make ends meet.
Balance-sheet woes were among the reasons many were downgraded by ratings firms. Exxon, for instance, lost its triple-A rating from S&P Global Ratings last year for the first time since the Great Depression.
Chevron sold assets to generate enough cash to pay for new spending and dividends, but new projects are likely to bring the company closer to Exxon's performance later in the year. As more money flows in, Chevron is likely to spend it reducing its debt ratio of about 24%, Chief Financial Officer Pat Yarrington said Friday.
"It's an OK place to be," she said. "Over time, I'd like to see us move a little lower in the debt profile."
Optimism from the relatively strong quarter has been tempered by growing concerns over whether a frenzied return to U.S. drilling will once again swamp markets.
As oil prices recovered in the past year to prices above $50 a barrel, U.S. oil companies returned to shale fields at a breakneck pace. The number of rigs operating has more than doubled from a year ago, according to RigData. U.S. production has risen to about 9.3 million barrels a day, just 3% shy of the 2015 peak, according to Rystad Energy.
The increase has been driven in part by lower costs that have improved drilling prospects in a number of fields, as well as positive sentiment stemming from a production cut from the Organization of the Petroleum Exporting Countries.
Still, some investors and market analysts are concerned the pace of the U.S. return to drilling has been too hot, raising the prospect that new shale production could bring so much new supply, prices will remain mired around $50 a barrel for years.
"Volumes are growing, particularly driven by North America," said Jeff Woodbury, Exxon's vice president of investor relations. That factor and others "indicate the need to be cautious going forward."
While a number of companies have managed to generate enough cash at that price to pay for new investment and dividends, executives have acknowledged it will be difficult for them to grow significantly unless oil prices rise further. The pipeline of new projects has dwindled significantly as the companies put the brakes on spending, a step that has the potential to limit growth opportunities within several years.
To make up the difference, Exxon and Chevron are turning for the most part to the Permian Basin in West Texas and New Mexico, an area of great promise in the industry that so far has generated little in the way of profits for many operators. Both companies have unveiled dramatic growth plans for the area.
Chevron said its U.S. production operations earned $80 million in the quarter. Exxon lost money for the ninth straight quarter in its U.S. drilling business, losing $18 million. That was an improvement from a loss of more than $800 million a year ago.
Still, the continued struggle to turn a profit in that business has troubled some investors, given that Exxon and Chevron have made shale operations a major focus for future growth and profitability.
Shares of Exxon, down 9% so far this year, rose slightly to $81.65. Chevron shares climbed about 1% to $106.70.
--Anne Steele and Erin Ailworth contributed to this article.
Write to Bradley Olson at Bradley.Olson@wsj.com
(END) Dow Jones Newswires
April 29, 2017 02:47 ET (06:47 GMT)