The Fuse

Oil Majors Post Poor First Quarter

by Nick Cunningham | May 09, 2019

The first quarter was not a great one for the oil majors, as low oil prices and narrow refining margins ate into profits. It marked a setback for the industry, which emerged last year largely repaired from 2014-2016 downturn.

The poor performance in the first three months of the year has not put a dent in confidence among top oil executives who see stronger profits later this year and next, although plenty of uncertainty remains.

Down first quarter
The largest integrated oil companies largely posted disappointing results for the first quarter. Here is a quick rundown:

  • ExxonMobil: $2.4 billion in profits, down 49 percent from $4.6 billion from the first quarter of 2018.
  • Chevron: $2.6 billion in profits, down 28 percent from $3.6 billion a year earlier.
  • Total SA: $2.8 billion in profits, down only 4 percent from the $2.9 billion in earnings last year.
  • Royal Dutch Shell: $5.3 billion on current cost of supply (similar to adjusted net income), down 7 percent from the $5.9 billion a year earlier.
  • BP: replacement cost profit of $2.4 billion, down 7 percent from $2.6 billion in 1Q2018

The common thread in all of the reports is lower oil prices compared to a year earlier, sharply lower LNG price, and smaller margins for refining. Despite the recent rally in prices, oil was still recovering from the fourth quarter downturn at the start of this year. An onslaught of new LNG projects coming online in 2019 has led to a situation of oversupply, pushing prices below $5/MMBtu, down by more than three-quarters from the peak reached a few years ago, although it’s important to note that much of the LNG trade occurs under contractual prices.

“Solid operating performance in the first quarter helped mitigate the impact of challenging Downstream and Chemical margin environments. In addition, we continued to benefit from our integrated business model,” Exxon CEO Darren W. Woods said in a press release. Woods pointed to Canada where mandatory production cuts helped recover heavily discounted Western Canada Select (WCS) prices, but also further eroded refining margins. “The change in Canadian crude differentials, as well as heavy scheduled maintenance, similar to the fourth quarter of 2018, affected our quarterly results,” Woods said.

Others were more direct. “ExxonMobil’s poor first-quarter earnings report revealed diminished profits, weak revenues, unproven cost reduction strategies, meager asset sales and the need to borrow US$3 billion to make ends meet,” the Institute for Energy Economics and Financial Analysis (IEEFA) put it bluntly.

Notably, Exxon lost $256 million on its refining unit, after earning $940 million a year earlier. As the Wall Street Journal noted, refining accounted for about a third of the profits for Chevron and Exxon over the last five years, but was a major source of weakness in the first quarter of this year.

The European oil majors fared better. Total’s earnings were down only slightly, which the company used as evidence of a strong performance. The French oil giant saw production jump by 9 percent year-on-year, due to the startup of a handful of projects in Nigeria, Australia and Angola. Shell and BP also weathered market volatility, holding up better than their American peers.

Shell pointed to its heavy investment in natural gas as a source of strength. The Anglo-Dutch company took in $2.57 billion from its Integrated Gas unit, surpassing analyst estimates by 24 percent. Shell controls about 25 percent of total global LNG exports, and despite the crash in LNG prices, Shell did well because much of its shipments are under contract with Brent-linked prices.

Oil executives from the top integrated companies all offered similar assurances to investors and analysts on their earnings calls, blaming temporary market conditions for their poor performances. They expressed confidence that the setback was a one-off, and that larger profits would return as soon as the second quarter.

Temporary setback?
Oil executives from the top integrated companies all offered similar assurances to investors and analysts on their earnings calls, blaming temporary market conditions for their poor performances. They expressed confidence that the setback was a one-off, and that larger profits would return as soon as the second quarter.

Supporting that view is the fact that refining margins have rebounded strongly as of late. High processing rates at the end of 2018 led to a glut of gasoline. In November 2018, margins on gasoline actually fell into negative territory, according to the EIA, after averaging 26 cents per gallon in the first half of the year. Diesel margins were much higher, but because gasoline is produced in conjunction with diesel, as refiners chased diesel sales by processing at elevated levels, they exacerbated the gasoline glut.

According to BP, the global average refining margin fell from $14.7 per barrel in the third quarter of 2018 to $10.2 per barrel in the first quarter of 2019. The good news for the oil majors is that refining margins have been on the upswing in the last few months, and are up to $16.7 per barrel so far in the second quarter, according to BP. While some seasonal factors come into play, the prevailing second-quarter margin is also up from the $14.9 per barrel margin in the second quarter of last year.

However, while downstream units have proven to be more reliable in recent years, refining also makes up a smaller slice of earnings compared to upstream production. For instance, even when looking at 1Q2018, a better period for refining, ExxonMobil earned $940 million from its downstream operations, but it took in $3.5 billion from its upstream unit.

The crash in refining margins meant that its downstream unit lost $256 million in the first quarter of 2019. That is a significant year-on-year decline to be sure, but Exxon’s upstream earnings fell by over $600 million as well, despite Brent oil prices only trading an average of $3-per-barrel lower between the two periods. In other words, even small changes in crude oil prices have an outsize impact on overall earnings. The oil majors, despite plans to diversify, still live and die by the price of oil.

As a result, there is no guarantee that the poor performance in the first quarter was an aberration.

As a result, there is no guarantee that the poor performance in the first quarter was an aberration. While top executives appear confident going forward, they are still at the mercy of the whims of the market.

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