Exxon, posting its first loss in decades, sets cuts in budget, output; Chevron tightens belt

By Christopher M. Matthews 

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 (May 2, 2020).

Exxon Mobil Corp. posted its first quarterly loss in three decades as it and rival Chevron Corp. painted a dismal picture of the oil industry, signaling that the impact of the coronavirus pandemic may hang over their businesses for much of 2020.

Exxon swung to a $610 million loss in the quarter as it took a "market-related" $2.9 billion charge. It reported $2.4 billion in profits during the same period last year. The bulk of the impairment was related to its downstream business, which refines oil into gasoline and other products.

Exxon Chief Executive Darren Woods said Friday the global economic shutdown is putting unprecedented pressure on oil prices. The largest U.S. oil company has cut $10 billion from its planned capital expenditures in 2020, a 30% budget cut.

"We've never seen anything like what the world is facing today," Mr. Woods said. "Bottom line: It's going to be a challenging summer with a pretty sloppy market."

Exxon projected that it will reduce production by roughly 400,000 barrels a day in the second quarter, including around 100,000 barrels a day in the Permian Basin of Texas and New Mexico, as a result of the new coronavirus.

Still, Mr. Woods said the company would continue to invest in projects to increase future oil production. Exxon's oil output was up slightly in the quarter, thanks to 9% increases in two of its key projects: Guyana and the Permian Basin, the largest U.S. oil field.

Chevron reported $3.6 billion in profits in the first quarter, up 36% from the same period last year, but said it expects financial results to fall later in the year due to the pandemic-led oil-price crash.

The company projected it would reduce output by 200,000 to 300,000 barrels a day in May, and 200,000 to 400,000 in June.

Chevron also announced additional budget reductions, saying it would cut capital expenditures by $2 billion on top of the $4 billion it had announced just weeks earlier. Chevron had planned to spend $20 billion in 2020 before the virus took hold but now says it will likely spend $14 billion. It also said it expects operating costs will decrease by $1 billion this year.

"The industry and the world are in a tough place right now," Chevron Chief Executive Mike Wirth said. "It feels like we're bumping along a bottom for energy demand when we look at the data. But it doesn't say it's going to snap back."

Earnings from Chevron's oil and gas production are already under pressure, falling to $241 million from $748 million during the same period last year. The company said it fetched $37 for a barrel of oil during the quarter, down from $48 a year earlier. Overall production of oil and equivalent liquids increased by 180,000 barrels a day from last year.

The global oil industry is facing an unprecedented challenge as the coronavirus has sapped oil demand by as much as 30 million barrels a day, roughly 30%.

Earlier this week, Royal Dutch Shell PLC cut its dividend for the first time since World War II, upending what has long been a fundamental bargain between oil majors and their investors, who count on steady payments from the companies.

On Wednesday, Exxon signaled it may break its decadeslong run of annual dividend increases, saying it would maintain current levels in the second quarter. Chevron and BP PLC also didn't increase their dividends.

BP reported a $4.3 billion loss in the first quarter as its debt climbed to its highest levels since 2015, while Shell reported a $24 million loss.

Major oil companies have moved quickly to reduce budgets as the coronavirus spread globally. Investors have been scrambling to figure out how much production each company will cut and when, according to Kevin MacCurdy, an analyst for Heikkinen Energy Advisors. The size of the cuts for each company could have huge consequences, as those that don't have to cut as much could be better positioned to capture rising oil demand as the virus subsides, he said.

"When it comes to production cuts, there will be winners and there will be losers," Mr. MacCurdy said. "What's been released so far is just the tip of the iceberg."

More than 600,000 barrels a day of production cuts have been announced in the U.S., and consulting firm Rystad Energy forecasts that U.S. output will fall from 12.8 million barrels a day in January to 10.9 million a day in June and as low as 10.3 million a day in September.

Chevron is among a group of companies that are negotiating production cuts with oil-rich nations that have agreed to reduce production. Russia, Saudi Arabia and the Organization of the Petroleum Exporting Countries agreed in April to cut global output by 13% or about 13 million barrels a day. About 15% of Chevron's oil-equivalent production in 2019 occurred in the OPEC members of Angola, Nigeria, the Republic of Congo and Venezuela.

"We're not immune to some of these realities," Mr. Wirth said.

Despite the cuts, Mr. Wirth said he expected Chevron's annual production to be roughly flat from last year, including in the Permian.

While Exxon and Chevron are cutting hundreds of thousands of barrels in the short-term, the volumes are proportionally smaller compared with what smaller companies are being forced to cut. Exxon's planned cuts amount to about 10% of its global oil production. By contrast, some smaller shale companies are cutting 50% or more of their production.

For years, Exxon and Chevron have prioritized investing in dividend increases and growing oil production. Those priorities are now stressing their balance sheets, according to Goldman Sachs. The bank estimates Exxon and Chevron will have added $53 billion and $29 billion, respectively, between 2010 and the end of this year, and said they should re-evaluate their capital allocation policies.

While the first-quarter results were painful for the companies, many analysts believe the next quarter could be even worse as the full impact of the economic shutdown becomes clearer.

"I think the most likely scenario we see is things get a lot worse before they get better," said Dan Pickering, founder of energy-focused asset management firm Pickering Energy Partners.

Some are hoping the silver lining is that the virus spurs a much-needed wave of consolidation in the U.S. oil industry, as analysts predict there will be dozens if not hundreds of bankruptcies. Exxon and Chevron could stand to benefit if they are able to swoop in to buy companies that emerge vulnerable following the crisis.

"We're certainly going to come out of this with a lot less companies, and probably more diverse companies," said George R. Ward, head of investment bank PJ Solomon's energy group.

Write to Christopher M. Matthews at christopher.matthews@wsj.com

 

(END) Dow Jones Newswires

May 02, 2020 02:47 ET (06:47 GMT)

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