‘Nasty year’ leaves oil investors wary as profits fall short

By Joe Carroll on 2/1/2017

CHICAGO (Bloomberg) -- Crude prices may have stabilized, but it’s still not a great time to be Big Oil.

Investors eliminated about $53 billion in market value for producers over three days as the twin titans of U.S. oil posted their worst annual financial outcomes in decades. With Royal Dutch Shell Plc, Total SA and BP Plc due to announce 2016 results in coming days, the grim headlines may not yet be over.

Exxon Mobil Corp. reported Tuesday a $2 billion writedown of its natural-gas fields, lower-than-expected quarterly profit and a full-year result that was its worst since 1996. That followed Chevron Corp., which reported its first yearly loss in at least 37 years on Jan. 27.

Drillers have responded to the 2 1/2-year slide in energy markets by firing hundreds of thousands of workers, auctioning off billions in assets, abandoning their riskiest projects and living on borrowed cash. The latest results, though, suggest the industry may still need recovery time, even with crude prices more than doubling since dipping to a 12-year low in February 2016.

“It was a pretty nasty year, one of the toughest years ever for the global oil industry,” said Sarah Emerson, managing director at Energy Security Analysis Inc. in Wakefield, Massachusetts. “The big difference now is oil is above $55/bbl.”

Oil producers had been flying high on OPEC’s Nov. 30 plan to cut output. Investors responded by adding $235 billion in market value to the Bloomberg World Oil & Gas Index in the ensuing eight weeks. By the end of the trading day Tuesday after Exxon’s report, the index had fallen 1.9% in three sessions, also pressured by investors weighing U.S. President Donald Trump’s first week in office.

Individually, Exxon fell as much as 2% on Tuesday. Chevron has lost 4.5% of its value since it announced results at the end of last week. The oil and gas index, which has slipped 2.9% since reaching a 17-month high on Jan. 5, was little changed as of 9:50 a.m. London time on Wednesday.

Bleak result

For Exxon, it was the ninth-straight quarter of year-on-year profit declines, the longest such streak since at least 1988. The bleak result capped Rex Tillerson’s final quarter at the helm of the world’s largest oil producer by market value. The market collapse aggravated the impact Exxon felt from its own stillborn Russian drilling venture, domestic legal disputes over whether the company engaged in climate-science deception and the loss of its gold-plated credit rating.

Exxon’s writedown slashed fourth-quarter profit to $1.68 billion, or 41 cents a share, more than 40% lower than the average estimate of 21 analysts in a Bloomberg survey, the widest gap since at least 2006.

Chevron and Exxon are taking markedly different approaches to the lingering sting of 2016. Whereas Chevron plans to shrink expenditures on drilling and other projects by 15% to conserve cash, Exxon said Tuesday it will boost its budget by 14% to $22 billion.

Exxon appears to be taking a page from U.S. shale drillers who are responding to the uptick in crude prices with ambitious expansion plans: Continental Resources Inc. and Diamondback Energy Inc. are lifting spending by 77% and 106%, respectively.

Exxon’s capital spending increase was “a much more assertive increase than most had anticipated,” said Guy Baber, an analyst at Piper Jaffray & Co.


In his first month on the job, Exxon Chairman and CEO Darren Woods is looking to deepwater drilling in South America and West Africa, gas exports in the South Pacific and shale riches in the Permian basin beneath Texas and New Mexico to bolster reserves and improve Exxon’s production and profit outlook.

Woods, an Exxon lifer whose responsibilities included overseeing the company’s fleet of refineries and chemical plants, became chairman and CEO on Jan. 1 after his mentor Tillerson was nominated for U.S. secretary of state.

The company agreed two weeks ago to shell out as much as $6.6 billion to double its Permian drilling rights in Exxon’s biggest transaction in 6 1/2 years.

The purchase may help replace reserves Exxon plans to wipe off the books in coming weeks. Exxon expects to follow through with most of the 4.6-Bbbl reserves reduction it warned investors about in October, V.P. Jeff Woodbury said during a webcast on Tuesday. That would equate to 19% of Exxon’s reserves and would be the largest de-booking since the 1999 merger that created the company in its modern form.

“Investors have been concerned with the pace of reserve replacement and production growth, particularly projected into the next decade,” said Sam Margolin, an analyst at Cowen Group Inc. Exxon has an advantage over its peers partly because of the huge trove of shares it holds in its treasury that can be used like cash for acquisitions, he said.

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