The earnings reports for the oil majors are widely expected to reveal sharp improvement for the oil industry, finally rebounding after more than three years of low prices. And it could get even better going forward, with oil prices seemingly safe from sub-$50 territory.
"Because the price of oil started so low in [the third quarter] and gradually increased throughout the quarter, we're really not expecting to see that flow through to earnings this quarter. It will likely be next quarter," Mark Tepper, president and CEO of Strategic Wealth Partners, told CNBC. "We do feel the tide has certainly turned, and overall, the landscape for the energy sector in general looks to be positive. So we're looking at these earnings reports for Exxon and Chevron to really confirm that optimism," he added.
Ahead of the quarterly earnings reports from the oil majors, the five largest companies are expected to generate a combined $34 billion in cash in the third quarter, according to Jefferies data cited by Bloomberg.
A raft of reports came out Friday that backed up the notion that the oil majors are starting to reap the benefits of cost cutting. Total SA posted the strongest earnings in more two years, reporting a $2.7 billion profit, a 29 percent increase from a year earlier. It was a solid year for the French oil company, which has emerged as one of the better managed oil majors in recent years. Oil and gas production jumped by 6 percent, Total took over a 300,000 bpd field in Qatar, and it acquired Danish oil company Maersk Oil, adding sizable assets in the North Sea.
ConocoPhillips has had a tougher time over the past few quarters, but the U.S.-based oil major reported improved figures on Friday: net earnings of $0.4 billion in the third quarter, up substantially from the $1 billion loss a year ago. Production was up by 1.4 percent, and so far this year the company’s cash flow has exceeded capital and dividends, a positive sign for the company. Related: The Rise Of The Petroyuan
Chevron reported a profit of $2 billion in the third quarter, an increase of more than 50 percent from the $1.3 billion earnings from the third quarter in 2016. That included one-off proceeds from a $675 million asset sale plus a write-down of $220 million.
ExxonMobil also posted a solid quarter, earning $4 billion, up nearly 50 percent from the $2.7 billion earned a year ago. “A 50 percent increase in earnings through solid business performance and higher commodity prices is a step forward in our plan to grow profitability,” Exxon CEO Darren Woods said in a statement. Some other highlights include a fifth discovery in Guyana, which has emerged as one of the company’s high priorities; a high-profile foray into offshore Brazil; and a sizable increase in Permian acreage. Exxon took a $160 million hit in the quarter, or 4 cents per share, from the damage related to Hurricane Harvey. Overall, Exxon’s cash flow has outpaced capex and dividends for the fourth consecutive quarter.
There are a couple of takeaways from these reports. Notably, most of the oil majors are approaching the point where they can fully fund capex and dividends from cash flow, a sign that they have adapted to a world of $50 oil. Not all of them are there just yet. BP says that it has a breakeven price of about $47 per barrel, although it aims to lower that threshold to just $35 to $40 per barrel by 2021. The $47/barrel breakeven point for BP is also sharply down from earlier this year when it said it needed $60 per barrel.
Still, some of the majors are still resorting to scrip dividends, which offer shareholders some stock in lieu of a dividend payment. The method relieves the company of some costs, and makes their breakeven price appear to be lower. But the strategy can’t last forever without leading to dilution of the company’s stock. Related: The Qatar Blockade Could Cause A Regional Recession
But the improved cash flow eases the pressure on the majors’ dividends, and Statoil even said it would end the scrip program in the fourth quarter, returning to cash payouts—a positive sign for the health of the oil majors.
That means that the dividend policies from the majors are probably safe for the foreseeable future. A year or two ago, the hefty dividend payouts appeared to be unsustainable. The oil majors piled on debt in order to keep up spending levels while also dishing out cash to shareholders. Analysts wondered how long they could keep that up. That dynamic led ExxonMobil to lose its coveted AAA credit rating in April 2016.
However, with oil prices firming up since then, and more importantly, the oil majors cutting spending and rightsizing the ship for $50 oil, they’ve created smoother waters.
Overall, the oil majors seemed to have successfully lowered their breakeven prices to around $50 per barrel.
By Nick Cunningham of Oilprice.com
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