By Bradley Olson 

The world's largest oil companies continue to disappoint investors with limited cash payouts and profits that have failed to match the rally in crude, reflecting the fragile nature of a recovery from one of the worst price crashes in a generation.

Exxon Mobil Corp. said net income rose to $4 billion for the April-June quarter, up 18% compared with the same period a year earlier but substantially below the 50% oil-price increase in that three-month stretch. The company's production fell to 3.6 million barrels of oil and gas a day, the lowest in more than 20 years, due in part to an earthquake in Papua New Guinea and a shift away from less profitable U.S. natural gas drilling.

Second-quarter profit at Chevron Corp. more than doubled to $3.4 billion and the company said it will begin buying back about $3 billion in shares annually. The results at both companies fell well short of Wall Street expectations -- the third-straight quarterly miss for Exxon -- although Chevron shares rallied on the buyback announcement while Exxon shares declined.

"They are disappointing the market," said Brian Youngberg, an analyst at Edward Jones. "You keep thinking the worst is over, but then they lay another egg."

Exxon executives sounded a rare note of contrition for the results, vowing to address issues that led to unexpected operational challenges. Senior Vice President Neil Chapman, who oversees the company's oil and gas production business, emphasized that Exxon's decisions on where to drill are based more on what is profitable than on growth targets.

"We're not focused on volume," he said. "We're focused on value."

He also said Exxon is "looking very hard" at potential asset sales.

Exxon, Chevron and other large companies have posted their highest second-quarter profits since 2014, when oil prices began a decline that bottomed out at below $30 a barrel. Yet as crude has recovered to about $70 a barrel, many are still holding back on spending and shareholder payouts as they recover from the painful downturn.

Together with European oil giants Royal Dutch Shell PLC, BP PLC and France's Total SA, the five largest Western companies are set to generate about $90 billion in excess cash in 2018 and 2019, exceeding records set in 2008 when oil sold for almost $150 a barrel.

Yet they are paying out far less of their cash haul to investors. In 2008, the five companies generated about $85 billion in excess cash, the highest ever, and bought back more than $50 billion in shares, according to FactSet.

This year, the buyback total is unlikely to exceed $15 billion, about 17% of the free cash flow expected by analysts at the five companies. The demand for more cash reflects shareholder skepticism about long-term oil and gas investments. As oil prices rose above $100 a barrel, many companies increased spending by tens of billions of dollars and failed to boost production or returns.

"Oil companies spent like drunken sailors in the last decade without generating great returns," said Mark Stoeckle, chief executive of Adams Funds, which owns about $175 million in Exxon and Chevron shares. "Investors now are much more interested in spending discipline and stock buybacks."

Smaller oil and gas producers are paying out far more, and shareholders are rewarding them for it. Anadarko Petroleum Corp., which has a market capitalization of $37 billion, bought back almost $3 billion in shares from September to March.

The company announced it would buy back an additional $1 billion through June 2019. Including reinvested dividends, Anadarko shares are up 62% in the last year, more than double the average increase among large companies like Exxon and Chevron.

Shell's shares fell by more than 3% Thursday after the company's quarterly profit fell short of expectations. The company announced a buyback of $25 billion through 2020, yet some shareholders were disappointed that only $2 billion shares will be repurchased in the next two months, analysts said.

BP shares fell slightly in premarket trading Friday after the company announced plans to spend $10.5 billion to buy most of the U.S. shale business of BHP Billiton Ltd.

Exxon, which collectively bought back tens of billions of dollars in shares annually when oil sold for more than $100 a barrel before the crash, has yet to return to large-scale buyback programs.

"The market loves capital discipline and shareholder returns," said Kris Nichol, an analyst at consultancy Wood Mackenzie Ltd. "The majors, so far, have been adhering to capital discipline, but they haven't been on the front foot in terms of shareholder returns."

Write to Bradley Olson at Bradley.Olson@wsj.com

 

(END) Dow Jones Newswires

July 27, 2018 14:12 ET (18:12 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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