By Bradley Olson
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.
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 28, 2017 19:08 ET (23:08 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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