By Bradley Olson and Sarah Kent
Big oil is back in the black, but investors aren't biting.
Profits at many of the world's largest energy companies soared
in the third quarter, with Exxon Mobil Corp. and Chevron Corp.
reporting increases Friday of 50%, and Total SA reporting a 40%
improvement over the prior year. Their improved earnings rose at
more than twice the rate of oil prices in the period.
The top five Western oil companies, including Royal Dutch Shell
PLC and BP PLC, which report next week, are now on track to post
the highest annual profits since crude plummeted three years ago
and forced them to restructure for a prolonged era of lower prices.
They have cut spending by more than $80 billion compared with
2013.
Still, the companies' turnaround didn't immediately carry over
to investor sentiment, even as prices for Brent crude, the leading
global benchmark, topped $60 a barrel Friday for the first time in
more than two years, a sign of continued market optimism.
Chevron fell about 3.7% and Exxon, which beat analyst
expectations, rose only slightly. This year, Exxon has fallen 7%
and Chevron is down 3%. Shell's American depositary receipts have
risen by 12.5%, while Total and BP's U.S. shares have had modest
gains. All have fallen short of the increase in the S&P 500
index.
Even as profits continue to improve, investors have soured on
oil companies, put off by years of poor returns and strategies
oriented toward growth that didn't improve profitability. Only
about $1.3 billion has flowed into energy-focused equity funds for
the year through Oct. 20, compared with over $6 billion in 2016 and
$20 billion in 2015, according to data from EPFR Global.
The caution comes as the oil giants are still barely able to pay
for new investments and dividends without selling assets or going
deeper into debt. Last year, the five companies spent $31 billion
more in cash on new investments and dividends than they generated
from operations, according to FactSet.
For most oil-and-gas companies, that pattern of outspending has
continued this year, although they are much closer to balance than
at any time since 2014. Even with the improvement, Exxon and its
peers are nowhere close to the record they set in 2011, when net
income at the five companies exceeded $140 billion.
That is more than 50% higher than the estimated $90 billion in
profits analysts expect this year from Facebook Inc., Apple Inc.,
Amazon.com Inc., Netflix Inc. and Google parent Alphabet Inc.,
according to FactSet. Those so-called "FAANG" stocks have soared in
the past several years.
Shareholders want to see continued improvement in profits and
more cash, analysts said. Chevron has gone more than a year without
raising its dividend, although it may do so soon. Some European oil
companies have made investor payments with shares, a quick fix
investors have accepted in the short term, even though it risks
diluting their holdings over time.
In a strong signal to investors, Norway's Statoil ASA said
Thursday it will move away from paying dividends in stock in the
fourth quarter and that it can cover its costs and investor payouts
at $50 a barrel this year. Statoil is the first big company with
such a "scrip dividend" program in place to say it can now manage
without.
"We think we are in a very good place," Chief Executive Eldar
Saetre said in an interview.
It will take time for investors to warm to the industry again,
perhaps a few quarters, but the companies are "moving in the right
direction," said Jason Kenney, an energy analyst at Banco
Santander. If oil prices stay at their current level and the
companies can show they have cash to spare in the coming quarters,
that could be "a turning point for interest from investors in the
sector," Mr. Kenney said.
Oil prices were 14% higher from July to September compared with
the same period in 2016. The spot price of liquefied natural gas,
which has increased in importance to the companies as they seek to
reduce emissions from their operations, has risen 60% since July,
according to analysts at Cowen.
But the companies' return to profits is largely due to spending
cuts, strong demand for chemicals and fuels like gasoline and
diesel, and a move to developments that can pay off quickly.
Exxon and Chevron are ramping up dramatically in the Permian
basin in West Texas. Exxon plans to boost output by 45% a year
there through the end of the decade, and the company is also
drilling wells in Texas and North Dakota that will extend for 3
miles horizontally.
"We've got a very focused research effort on this," said Jeff
Woodbury, vice president and corporate secretary at Exxon, said
Friday in an investor call. The company wants to make a "step
change" in how shale resources are developed, he said.
Exxon, Total and Shell are now run by former refining
executives, and Chevron will be as well in February, when Michael
Wirth is scheduled to take over for John Watson, the company's
departing chief executive.
The pivot to refining expertise in the top executive ranks comes
as the oil giants seek experienced hands at managing spending
rather than chasing potentially expensive new barrels. To keep
costs down, many of the companies have curbed their ambitions,
turning instead to smaller, incremental developments that pay back
more quickly than multibillion-dollar megaprojects.
"These companies are becoming much more streamlined," said Brian
Youngberg, an energy analyst at Edward Jones. "They've all been
aggressive in driving costs down to maintain profitability even if
oil prices remain low. You're not seeing as many big, expensive
projects. Those days are gone."
The speed at which the companies have managed to reset has taken
even some executives by surprise.
"Frankly, if somebody had told me three years ago that we would
be at 10% return on equity by mid-2017 or third quarter, I would
have been very happy," Total CEO Patrick Pouyanné said in an
interview. "It would have seemed to me impossible."
Write to Bradley Olson at Bradley.Olson@wsj.com and Sarah Kent
at sarah.kent@wsj.com
(END) Dow Jones Newswires
October 27, 2017 13:48 ET (17:48 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
Chevron (NYSE:CVX)
Historical Stock Chart
From Aug 2024 to Sep 2024
Chevron (NYSE:CVX)
Historical Stock Chart
From Sep 2023 to Sep 2024