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Gloom Mounts for Big Oil as Exxon, Chevron Disappoint Investors


By Joe Carroll and Kevin Crowley

(Bloomberg)Exxon Mobil Corp. and Chevron Corp. are discovering that the vaunted Permian Basin is a double-edged sword: surging shale supplies there are driving down global energy prices.North America’s largest oil explorers posted their weakest results in years on Friday, bedeviled by poor performances in almost all of their business lines. The main culprit: excess supplies of everything from gas to motor fuels and polyethylene.Exxon, which in recent years positioned the Permian as a linchpin of its global growth strategy, on Friday disappointed some analysts by saying output in the world’s biggest shale patch won’t expand in a smooth, uninterrupted fashion. Cash flow failed to cover its dividend for the eighth quarter in the last ten as the company boosted spending on new projects.For Chevron, while Permian wells helped lift worldwide production to an all-time high, that wasn’t enough to patch over a massive writedown in the value of gas fields and the deepest quarterly loss in a decade. Analysts questioned whether the company has enough in the tank to keep growing beyond the mid-2020s.

Big Oil stocks yield two to three times more than 10-year Treasuries

Just to cover project spending and dividend payouts without borrowing, Exxon would have needed international crude prices around $100 a barrel, according to Citigroup Inc. analyst Alastair Syme. That’s well above the $62 fourth-quarter average.

To read about the ominous trends in American shale gas, click here.

“Shareholder returns are poor, and debt is rising in a way that suggests that attractive dividends yields are unsustainable,” veteran oil-industry analyst Paul Sankey of Mizuho Securities USA LLC said in a note to clients. “What is so concerning about these mega-oil results is that they come in a quarter that featured an average $62/bbl Brent price.”

Investor Backlash

Exxon shares fell so much on Friday that the decline wiped out $12 billion in market value in less than three hours. The last time the stock traded this low was in late 2010, when Chief Executive Officer Darren Woods was a freshly minted vice president of supply and transportation, still several promotions away from the top job.

Chevron also slumped, dropping as much as 4.5% for one of the day’s worst showing on the Dow Jones Industrial Average. The weak results were presaged by Shell’s gloomy earnings report on Thursday that prompted the European supermajor to slow share buybacks.

The pain is far from over: Woods warned that conditions in its chemical business will continue to be “challenging” through 2020 and predicted the worldwide gas glut will take some time to burn off. Years of high spending on new projects will position the Exxon to “capture the eventual upswing” in prices, he said.

Big Oil is at a critical juncture as investors increasingly fret about the role of fossil fuels in warming the planet. Weak quarterly results can undermine confidence in the dividends that compelled investors to bet on companies like Exxon, Royal Dutch Shell Plc and Chevron.

Borrowed Time

Exxon’s $35 billion-a-year rebuild of its upstream portfolio is swallowing up so much cash that the company is unable to consistently pay dividends from cash flow, leaning heavily on asset sales and borrowing to fund the payout.

Big Spendin'

The supermajor’s fourth-quarter capital spending exceeded analysts’ estimates by 36%, demonstrating Exxon’s commitment to a raft of new investments from offshore oil in Brazil to liquefied natural gas in Mozambique.

Excluding the $3.7 billion sale of its Norwegian assets, per-share earnings were 41 cents, the lowest since 2016. The $355 million loss in chemicals was the first negative return for that business since 2006, according to RBC Capital Markets.

Exxon’s Woods is facing plunging margins in oil refining and chemicals at a time when crude prices have stagnated and natural gas is in free-fall. Gas makes up almost nearly 40% of its overall production. In the U.S., the fuel is trading close to its 1990s lows, while prices for liquefied cargoes heading for Asia have tumbled almost 50% in the past year.

“Lower cash flow combined with heavy capital investment led to negative free cash flow and a rise in debt that exceeded our expectations for the year,” Moody’s Investors Service Inc. analyst Pete Speer said in a note. “These trends continue to pressure the company’s credit metrics as captured in our negative outlook.”



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