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Oil Giants Post Big Losses, Prepare for Long Slump -- WSJ

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08/01/2020 | 02:48am EDT

By Christopher M. Matthews

Big oil companies endured one of their worst second quarters ever and are positioning themselves for prolonged pain as the coronavirus pandemic continues to sap global demand for fossil fuels.

Exxon Mobil Corp. posted a quarterly loss for the second straight quarter for the first time this century on Friday, reporting a loss of $1.1 billion, compared with a profit of $3.1 billion a year ago. Exxon, the largest U.S. oil company, hadn't reported back-to-back losses for at least 22 years, according to Dow Jones Market Data, whose figures extend to 1998.

"The global pandemic and oversupply conditions significantly impacted our second-quarter financial results with lower prices, margins, and sales volumes," Exxon Chief Executive Darren Woods said.

Chevron Corp. said Friday it lost $8.3 billion in the second quarter, down from $4.3 billion in profits during the same period last year, its largest loss since at least 1998. It wrote down $5.7 billion in oil-and-gas properties, including $2.6 billion in Venezuela, citing uncertainty in the country ruled by strongman Nicolás Maduro. Chevron also said it lowered its internal estimates for future commodity prices.

Royal Dutch Shell PLC and Total SA reported significant losses in the second quarter earlier this week, as the impact of the pandemic and a worsening long-term outlook for commodity prices spurred them to write down the value of their assets.

The dismal results are ratcheting up the problems for the oil giants, which were struggling to attract investors even before the pandemic, as concerns over climate-change regulations and increasing competition from renewable energy and electric vehicles cloud the future for fossil fuels.

Holdings of oil-and-gas stocks by active money managers are at a 15-year low, according to investment bank Evercore ISI. BP PLC, Shell and Total are all trading at 30-year lows relative to the overall S&P 500. Exxon is trading at its lowest level to the S&P 500 since 1977, according to the bank.

Many of the big oil companies have sought to retain investors despite slowing growth and profits over the past decade by paying out hefty dividends, but those payouts are proving hard to sustain during the pandemic.

Crude prices have stabilized at around $40 a barrel, providing modest relief for the industry after U.S. oil prices briefly turned negative for the first time ever in April. But none of the world's largest oil companies now foresee a rapid recovery as countries continue to struggle with containing the coronavirus.

Chevron CEO Mike Wirth said his company faced an uncertain future for energy demand and couldn't predict commodity prices with confidence right now.

"We expect a choppy economy and a choppy market," Mr. Wirth said in an interview earlier in July. "It all depends on the virus and the policies enacted to respond to it."

Oil and gas production by both Exxon and Chevron decreased in the quarter, down 7% and 3%, respectively, from a year ago, as the companies shut off wells to avoid selling into a weak market. Exxon's production-and-exploration business lost $1.7 billion, which Exxon attributed to lower commodity prices. Chevron's production unit lost $6.1 billion.

U.S. oil prices closed below $40 per barrel Thursday for the first time in three weeks.

For the entire second quarter, U.S. oil prices averaged $28 per barrel and Brent crude averaged about $33, according to Dow Jones Market Data, prices at which even the largest oil companies struggle to turn a profit, analysts say.

While major stock indexes have recovered from April, when they fell to their lowest levels in years, oil and gas stocks have continued to lag despite the slight rebound in commodity prices.

Many of the world's largest energy companies, including Exxon and Chevron, have for years used an integrated business model, which has historically allowed them to weather most market conditions.

By owning oil and gas wells, along with the downstream plants to manufacture refined products like gasoline and chemicals, the companies were long able to capitalize in one sector of their business, regardless of whether oil prices were high or low.

But that model has failed to deliver strong returns for most of the past decade, as the world has faced a glut of fossil fuels triggered in part by America's fracking boom, and it isn't protecting the companies now, according to Evercore ISI analyst Doug Terreson.

"A broad-based reassessment of the capital-management programs at the big oils is required at this point," Mr. Terreson said.

Oil companies have been forced to take dramatic action to shore up their finances in recent months, including cutting tens of billions of dollars from their budgets and laying off thousands of employees.

Exxon, which had previously disclosed a 30% cut to capital expenditures in 2020, said on Friday it has "identified significant potential for additional reductions" and said capital spending in 2021 will be lower than this year's spending.

Its steepest cuts have been to U.S. shale drilling, particularly in the Permian Basin, the most active U.S. oil field, where it removed half of its drilling rigs and will cut half of the remaining 30 rigs by the end of year. Chevron is operating just four rigs in the Permian and said production there would decline around 7% this year.

Shell in April cut its dividend for the first time since World War II to avoid having to borrow to fund it. It reported a second-quarter loss of $18.4 billion on Thursday, which included a $16.8 billion write-down, while French giant Total posted an $8.4 billion loss including an $8.1 billion write-down. Both companies report net income attributable to shareholders, a proxy for net profits. BP reports Tuesday.

Excluding impairments, Shell and Total actually turned a profit during the quarter as their trading units helped stave off even larger losses.

Exxon and Chevron have promised they will maintain their dividends, viewed by many investors as the most attractive part of owning their stocks. Some analysts predict Exxon may be forced to cut its dividend in 2021 if market conditions don't recover.

Exxon's dividend payments cost the company almost $15 billion a year. The company's debt grew by $8.8 billion in the quarter, according to Goldman Sach Group Inc., which said Exxon will need oil prices around $75 per barrel in 2021 to cover its dividend payments from cash flow. Exxon said Friday it wouldn't take on additional debt.

Dan Pickering, chief investment officer of energy investment firm Pickering Energy Partners LP, said the industry can survive at $40 oil but needs significantly higher prices to thrive. According to Mr. Pickering, who said he holds small positions in Exxon and Chevron, oil companies will have to continue cost-cutting for the foreseeable future.

"You've got to assume that this is the world we're going to be in, Mr. Pickering said. "And, if this is the world we're going to be in, the cost structure is too high."

--Dave Sebastian contributed to this article.

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

 

Stocks mentioned in the article
ChangeLast1st jan.
BP PLC 1.45% 278.95 Delayed Quote.-41.66%
CHEVRON CORPORATION 1.06% 84.455 Delayed Quote.-30.35%
CONOCOPHILLIPS -1.24% 36.8 Delayed Quote.-42.50%
DJ INDUSTRIAL 0.84% 26617.95 Delayed Quote.-7.39%
ENI SPA 0.52% 7.561 Delayed Quote.-45.54%
EVERCORE INC. 2.59% 56.765 Delayed Quote.-26.03%
EXXON MOBIL CORPORATION -0.21% 41.8499 Delayed Quote.-39.70%
LONDON BRENT OIL 0.69% 43.64 Delayed Quote.-33.91%
NASDAQ 100 1.31% 11037.566936 Delayed Quote.24.88%
NASDAQ COMP. 1.21% 10869.046203 Delayed Quote.19.76%
ROYAL DUTCH SHELL PLC 1.07% 12.798 Delayed Quote.-51.51%
S&P 500 0.78% 3293.53 Delayed Quote.1.25%
TOTAL SE 4.03% 32.555 Real-time Quote.-36.38%
WTI 1.21% 40.535 Delayed Quote.-34.36%
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