The first quarter of 2018 was the best one in years for the oil majors. Still, despite huge profits, the largest oil companies are moving forward cautiously, keeping spending in check, just in case prices fall again.
The first three months of the year saw a substantial run up in oil prices, hitting multi-year highs. At the same time, the oil majors have succeeded in cutting costs, and in many cases, continuing to grow production. Here is a quick rundown of some key figures:
• BP’s profits jumped by 71 percent to $2.4 billion, compared to $1.4 billion a year earlier. Production also increased by 6 percent.
• Shell’s profits surged to $5.32 billion, up 42 percent from last year.
• Chevron’s earnings jumped to $3.6 billion, an increase of 36 percent. Production increased by 6.5 percent.
• ExxonMobil saw its net income rise by a more modest 16 percent to $4.7 billion, while production declined 6 percent.
The numbers are striking. Profits are the highest in years, and many of the oil majors are earning more with oil in the $60s than they were when oil prices were above $100 per barrel before the 2014 downturn.
Now, the profits are finally back to where they were prior to the oil market downturn, but oil executives are trying not to let spending get out of control again.
Unlike previous cycles, this one feels different. In the past, when oil prices increased, the oil majors gave the go-ahead to ever more costly megaprojects – ultra-deep water, massive LNG export terminals, oil sands and Arctic drilling characterized the pre-2014 period.
But even though oil prices are up roughly 50 percent from a year ago, spending by the oil majors is only set to rise by 7 percent this year, according to Wood Mackenzie and cited by the WSJ.
The reason is that shareholders are still pressuring the companies not to hike spending and drilling, which could sow the seeds of the next downturn if too much supply comes online. Also, Wall Street is still skeptical of the majors, despite the huge turnaround in profits. There are short-term concerns about the sustainability of higher oil prices, while there are also long-term fears about peak demand.
Investors want cash diverted to them, not plowed back into the ground to boost production. As evidence of this, ConocoPhillips saw its share price jump when it announced $500 million in share repurchases.
The newfound restraint, at least as of now, appears here to stay, even though oil prices are at three-year highs.
Shell, for instance, says that any new offshore oil project will need to breakeven at about $40 per barrel or lower, which is roughly half the cost of offshore projects prior to the 2014 oil market meltdown. “You’ve got to think about that 35-40 range,” Harry Brekelmans, Shell’s project and technology director, told Bloomberg. “It’s something we want to be very disciplined around because it gives you reassurance that going forward, your portfolio is resilient.” Last week, Shell sanctioned its Vito offshore project in the Gulf of Mexico, which it says will breakeven at $35 per barrel.
The reason why the oil majors want long-term projects to have such low breakeven prices is that nobody is certain about the trajectory of oil prices. Oil is back at $70, but for how long? "Sometimes people forget that actually, it was not that long ago we were down at $28 a barrel … I think oil prices today feel a bit frothy," Brian Gilvary, BP’s CFO, told CNBC on Tuesday.
While most of the majors are pleased with the best results in years, ExxonMobil is the outlier in the bunch. The supermajor has struggled to grow production and unlike the rest, Exxon has signaled that it would need to dramatically ramp up spending over the next decade in order to boost output. In the first quarter, Exxon’s production declined to its lowest level since 1999.
“(Exxon’s) underlying upstream fundamentals appear to have suffered a structural deterioration, due in large part to two massive, ill-timed, low margin and extremely expensive investments,” Barclays analysts said, referring to Exxon’s acquisition of shale gas producer XTO Energy nearly a decade ago and the Kearl oil sands project in Canada. “Essentially, 1Q18 results are implicitly revealing the issues (Exxon) is facing with the status quo of its upstream portfolio.”
Its peers, particularly Chevron and Shell, have already gone through a period of heavy spending and are now enjoying the fruits of those outlays with higher production coming from some enormous LNG export facilities in Australia, for example. With new projects online, Shell and Chevron can maintain more modest levels of spending.
Exxon’s share price fell more than 3 percent after it reported its latest earnings, and its stock is only slightly higher than the low point hit two years ago when oil prices sank below $30 per barrel. Exxon offered investors no return over the past year; Chevron posted a 24 percent return.
Exxon’s plans to ramp up drilling activity is occurring at a time when that strategy is out of favor with Wall Street. “Exxon’s strategy is at odds with what the market is currently looking for,” Mark Stoeckle at Adams Express Co. in Boston told Bloomberg. “Chevron’s a darling right now. It’s the juxtaposition of a company with high investment and little production growth with one that’s harvesting cash.”
By Nick Cunningham, Oilprice.com
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