Big Oil Surprises Analysts, Is The Worst Behind Us?

Once again its earnings season and the first quarter is likely to be one of the most closely watched in a long time since it encompasses a period of time in which oil prices were at their lowest.

WTI and Brent dropped below $30 per barrel in January and February, hitting their lowest levels in more than a decade. The oil industry had posted a sea of red ink in prior quarters, but the first three months of 2016 had the ingredients to be much more painful.

So far, the results have been a mixed bag, with several companies doing better than expected. BP reported an 80 percent decline in earnings, a staggering fall in revenue from a year ago. The British oil giant posted a $2.6 billion profit in the first quarter of last year, but only a net profit of $532 million in 1Q2016. Worse, that excludes charges related to the Macondo well blowout in 2010, which forced the company to take another $917 million in pre-tax charges in the first quarter. When including those charges, BP's result flips to a quarterly loss of about $485 million. Related: Has the Oil Price Rally Gone Too Far?

But BP also performed much better than market analysts had anticipated. Investors agreed - BP's stock shot up by more than 5 percent on the news. Also, shareholders are hoping the worst is over. Oil prices are starting to rise, and BP won approval from a court in March to settle all outstanding federal and state claims related to the 2010 disaster.

Norway's Statoil also posted a net profit for the quarter of $607 million, beating the $115 million loss that analysts expected. The modest profit comes a year after a net loss of $4.58 billion, made worse by huge impairment charges. "We are radically improving our project break evens and we are on track to re-set costs and thereby impact the parameters that we can control", Statoil's CEO Eldar Sætre said in a statement. Related: First "Illegal" Shipment Of Oil Leaves Eastern Libya

French oil company Total also exceeded expectations, posting a $1.64 billion profit for the first quarter, although that figure was down by 37 percent from 1Q2015. Analysts expected a profit of just $1.25 billion. The result stems from the fact that Total's upstream unit "benefited from the lowest technical costs among the majors," the company's CEO Patrick Pouyanne said in a statement. Total says that it produced oil with costs at $23 per barrel last year, whereas its rivals spent between $26 and $44 per barrel. Total also managed to raise oil and gas production to a record high of 2.48 million barrels of oil equivalent per day. Total expects to trim another $2.4 billion from its spending plans this year relative to 2014 levels, and also raise $4 billion in asset sales.

There was a similar trend that emerged from the group: the quarterly performances would have been much worse if not for downstream earnings. Refining has been much more stable during the oil price downturn, as higher margins offset the losses from exploration and production. Earnings from Total's refining and chemicals division were up "thanks to a record-high utilization rate of 94 percent and favorable petrochemicals margins," Pouyanne said. The oil majors are extremely large, integrated companies that rely very heavily on refining. Smaller upstream-only companies, particularly in the U.S. shale patch, do not have this security, which is why many of them are faring much worse these days. Related: Can Oil Continue To Rally Like This?

Still, there are serious questions regarding the oil majors' ability to keep up high dividend payouts, which executives have fiercely protected even while taking savage cuts to spending. But all of them insist that there are no plans at this point to touch the dividend policies. Total says that at $60 per barrel, the company can generate enough cash flow to fully fund the dividend through 2017 without needing to take on debt to do so.

The better-than-expected results thus far - which stem from improving refining margins and aggressive cost cutting - suggests that the remaining companies (namely Shell, Chevron, Eni and ExxonMobil) could beat estimates too. "It seems the cost reduction has been implemented better than expected by the companies," Alexandre Andlauer, an analyst at AlphaValue SAS in Paris, told Bloomberg. "It's now more than probable the others will beat estimates too."

Exxon, Chevron, and Eni will announce on April 29 while Shell will announce on May 4.

By Nick Cunningham of Oilprice.com

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