Investors expect to see more from crude's rally
By Bradley Olson
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (July 28, 2018).
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 free cash flow 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 proportionally 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 were little changed 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 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 28, 2018 02:47 ET (06:47 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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