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Oil's Profits Fail to Draw Investors -- WSJ

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10/28/2017 | 02:48am EDT
By Bradley Olson and Sarah Kent 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (October 28, 2017).

Big oil is back in the black, but investors aren't biting.

Profits at many of the world's largest energy companies soared in the third quarter, with Exxon Mobil Corp. and Chevron Corp. reporting increases Friday of 50%, and Total SA reporting a 40% improvement over the prior year. Their improved earnings rose at more than twice the rate of oil prices in the period.

The top five Western oil companies, including Royal Dutch Shell PLC and BP PLC, which report next week, are now on track to post the highest annual profits since crude plummeted three years ago and forced them to restructure for a prolonged era of lower prices. They have cut spending by more than $80 billion compared with 2013.

Still, the companies' turnaround didn't immediately carry over to investor sentiment, even as prices for Brent crude, the leading global benchmark, topped $60 a barrel Friday for the first time in more than two years, a sign of continued market optimism.

Chevron fell about 3.7% and Exxon, which beat analyst expectations, rose only slightly. This year, Exxon has fallen 7% and Chevron is down 3%. Shell's American depositary receipts have risen by 12.5%, while Total and BP's U.S. shares have had modest gains. All have fallen short of the increase in the S&P 500 index.

Even as profits continue to improve, investors have soured on oil companies, put off by years of poor returns and strategies oriented toward growth that didn't improve profitability. Only about $1.3 billion has flowed into energy-focused equity funds for the year through Oct. 20, compared with over $6 billion in 2016 and $20 billion in 2015, according to data from EPFR Global.

The caution comes as the oil giants are still barely able to pay for new investments and dividends without selling assets or going deeper into debt. Last year, the five companies spent $31 billion more in cash on new investments and dividends than they generated from operations, according to FactSet.

For most oil-and-gas companies, that pattern of outspending has continued this year, although they are much closer to balance than at any time since 2014. Even with the improvement, Exxon and its peers are nowhere close to the record they set in 2011, when net income at the five companies exceeded $140 billion.

That is more than 50% higher than the estimated $90 billion in profits analysts expect this year from Facebook Inc., Apple Inc., Amazon.com Inc., Netflix Inc. and Google parent Alphabet Inc., according to FactSet. Those so-called "FAANG" stocks have soared in the past several years.

Shareholders want to see continued improvement in profits and more cash, analysts said. Chevron has gone more than a year without raising its dividend, although it may do so soon. Some European oil companies have made investor payments with shares, a quick fix investors have accepted in the short term, even though it risks diluting their holdings over time.

In a strong signal to investors, Norway's Statoil ASA said Thursday it will move away from paying dividends in stock in the fourth quarter and that it can cover its costs and investor payouts at $50 a barrel this year. Statoil is the first big company with such a "scrip dividend" program in place to say it can now manage without.

"We think we are in a very good place," Chief Executive Eldar Saetre said in an interview.

It will take time for investors to warm to the industry again, perhaps a few quarters, but the companies are "moving in the right direction," said Jason Kenney, an energy analyst at Banco Santander. If oil prices stay at their current level and the companies can show they have cash to spare in the coming quarters, that could be "a turning point for interest from investors in the sector," Mr. Kenney said.

Oil prices were 14% higher from July to September compared with the same period in 2016. The spot price of liquefied natural gas, which has increased in importance to the companies as they seek to reduce emissions from their operations, has risen 60% since July, according to analysts at Cowen.

But the companies' return to profits is largely due to spending cuts, strong demand for chemicals and fuels like gasoline and diesel, and a move to developments that can pay off quickly.

Exxon and Chevron are ramping up dramatically in the Permian basin in West Texas. Exxon plans to boost output by 45% a year there through the end of the decade, and the company is also drilling wells in Texas and North Dakota that will extend for 3 miles horizontally.

"We've got a very focused research effort on this," said Jeff Woodbury, vice president and corporate secretary at Exxon, said Friday in an investor call. The company wants to make a "step change" in how shale resources are developed, he said.

Exxon, Total and Shell are now run by former refining executives, and Chevron will be as well in February, when Michael Wirth is scheduled to take over for John Watson, the company's departing chief executive.

The pivot to refining expertise in the top executive ranks comes as the oil giants seek experienced hands at managing spending rather than chasing potentially expensive new barrels. To keep costs down, many of the companies have curbed their ambitions, turning instead to smaller, incremental developments that pay back more quickly than multibillion-dollar megaprojects.

"These companies are becoming much more streamlined," said Brian Youngberg, an energy analyst at Edward Jones. "They've all been aggressive in driving costs down to maintain profitability even if oil prices remain low. You're not seeing as many big, expensive projects. Those days are gone."

The speed at which the companies have managed to reset has taken even some executives by surprise.

"Frankly, if somebody had told me three years ago that we would be at 10% return on equity by mid-2017 or third quarter, I would have been very happy," Total CEO Patrick Pouyanné said in an interview. "It would have seemed to me impossible."

Corrections & Amplifications BP and Shell report earnings next week. An earlier headline with this article incorrectly stated that their quarterly earnings had jumped.

Write to Bradley Olson at Bradley.Olson@wsj.com and Sarah Kent at sarah.kent@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
ALPHABET INC. 0.62% 1516.65 Delayed Quote.12.53%
BP PLC -1.98% 301.2 Delayed Quote.-33.99%
CHANGE INC. 16.85% 10400 End-of-day quote.257.63%
CHEVRON CORPORATION -0.99% 89.82 Delayed Quote.-24.72%
DEERE & COMPANY -1.46% 189.5 Delayed Quote.11.00%
DJ INDUSTRIAL -0.29% 27896.72 Delayed Quote.-1.97%
EXXON MOBIL CORPORATION -2.45% 43.01 Delayed Quote.-36.82%
FRANKLY INC. 0.00%End-of-day quote.-30.16%
JASON CO., LTD. 2.13% 817 End-of-day quote.124.45%
LETS HOLDINGS GROUP CO., LTD. 2.89% 11.4 End-of-day quote.88.74%
LINE CORPORATION -0.18% 5410 End-of-day quote.1.12%
LOOK HOLDINGS INCORPORATED 0.81% 750 End-of-day quote.-40.10%
NASDAQ 100 0.19% 11178.370244 Delayed Quote.27.76%
NASDAQ COMP. 0.27% 11042.504225 Delayed Quote.22.73%
NEXT PLC -1.93% 5902 Delayed Quote.-14.25%
ROYAL DUTCH SHELL PLC -2.74% 13.494 Delayed Quote.-46.46%
S&P 500 -0.20% 3373.43 Delayed Quote.3.19%
SEEK LIMITED -0.26% 19.53 End-of-day quote.-13.39%
STEP CO.,LTD. 0.60% 1500 End-of-day quote.-5.00%
TOTAL SE -1.25% 33.99 Real-time Quote.-30.04%
WORLD CO., LTD. 1.55% 1571 End-of-day quote.-41.62%
WTI -0.11% 42.355 Delayed Quote.-32.22%
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