You know it's a tough time in the oil patch when industry major Exxon Mobil Corp. fails to meet expectations. Ditto for No. 2-ranked Chevron Corp. These two behemoths recently made public their financial results for the first quarter, and it wasn't pretty.
While still earning a net profit, Irving, TX-based ExxonMobil suffered its worst quarterly results in 10 years. Income fell to $1.8 billion in the first quarter, down nearly $1 billion from the prior quarter and a whopping $3.1 billion below its $4.9 billion in earnings for the same period last year. The company attributed the decline to "sharply lower commodity prices and weaker refining margins."
ExxonMobil's upstream division, usually a cash cow, endured a $76 million loss. That was partially offset by higher earnings in the company's chemical division. Total revenues tumbled 28% to $48.7 billion.
In a written comment, Rex W. Tillerson, Exxon's chairman and CEO, said, "The organization continues to respond effectively to challenging industry conditions, capturing enhancements to operational performance and creating margin uplift despite low prices. The scale and integrated nature of our cash flow provide competitive advantage and support consistent strategy execution."
The current tough operating conditions resulted in San Ramon, CA-based Chevron's first quarterly loss in decades -$725 million. This compares with earnings of $2.6 billion in the first quarter of 2015. The company says that foreign currency effects decreased earnings in the recent quarter by $319 million, compared with an increase of $580 million a year earlier.
Total operating revenues in first quarter 2016 were $23 billion, compared to $32 billion in the year-ago period.
"First quarter results declined from a year ago," said Chairman and CEO John Watson. "Our upstream business was impacted by a more than 35% decline in crude oil prices. Our downstream operations continued to perform well, although overall industry conditions and margins this quarter were weaker than a year ago."
Watson said the company is focusing on improving cash flow and is ramping up production in the Permian Basin and elsewhere.
"We continue to lower our cost structure with better pricing, workflow efficiencies and matching our organizational size to expected future activity levels," Watson added. "Our capital spending is coming down. We are moving our focus to high-return, shorter-cycle projects and pacing longer-cycle investments."
The weak performances by Exxon and Chevron are the latest in a wave of petroleum industry results attributed to the pounding the industry is taking from sustained low prices. Earlier this week, both BP and ConocoPhillips reported losses for the quarter. Mid-sized and smaller US independents were the proverbial "canary in the cage" as they were the first to suffer from the decline in commodity prices, with large independents and oil majors now seeing losses as well.
To state the obvious, this is a difficult time for the oil and gas industry. Oil prices have been inching upward, and at this writing WTI crude is nearing $46 a barrel and Brent is just above $48, but that is not enough of a climb for oil companies to improve their financial outlook - not to investors, not to most analysts, and certainly not to credit ratings agencies.
The worst oil crash in a generation has cost Exxon Mobil Corp. the gold-plated credit rating it had held since the Great Depression.
On April 26, Standard & Poor's stripped Exxon of its highest AAA measure of credit-worthiness, cutting it to AA+, the same as the US government. It's a defeat for Exxon, which sought to retain the rating after S&P placed it on notice in February. Before the downgrade, Exxon shared the distinction with just two other companies: Johnson & Johnson and Microsoft Corp.
The downgrade is another blow to Tillerson's legacy as he nears the company's mandatory retirement age next year. Since he took over the leadership of the world's largest publicly traded oil company a decade ago, he bet heavily on natural gas and lost. The company's 2009 acquisition of Fort Worth, TX-based XTO Energy for $35 billion never lived up to expectations as the natural gas market continues to languish. In addition, Exxon's ill-advised partnership with Russia's state-controlled Rosneft cost the Texas company approximately $1 billion as a result of Western sanctions against Russia.
S&P recently lowered its corporate credit and senior unsecured ratings on ConocoPhillips as well. The Houston-based E&P company had its ratings lowered to A- from A. Although Conoco was removed from CreditWatch with negative implications on Feb. 2, S&P says the outlook for the company is "negative." The outlook could be revised to "stable" if financial performance improves, says S&P.
We are accustomed to seeing smaller, over-leveraged companies suffer in the current environment, as a growing number take steps to restructure and reorganize. What is unusual this time is that the oil majors and IOCs do not seem immune to the conditions.
Crude oil production in the US is finally starting to drop, and that's a good sign for rising oil prices. Output has fallen below nine million barrels per day, which is about 700,000 barrels a day below the peak rate in April 2015, and the decline seems to be accelerating.
Oil prices have risen about $10/bbl in the past month or so, but is this a trend or a market glitch? Only time will tell if low prices bottomed out in the first quarter, but the industry is hopeful.