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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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‘’The Fat Margins Have Disappeared’’ - Big Oil Disappoints

After some strong quarters for Big Oil, the first three months of 2019 proved to be a disappointment.

Weighed down by lower oil prices, narrower refining margins and weak LNG prices, profits at the largest integrated oil companies shrank in the first quarter. “We’re not looking for a great first quarter for the group,” Blake Fernandez, senior research analyst with Piper Jaffray & Co’s Simmons Energy, told Reuters ahead of the earnings releases. He does not expect the poor performance to drag down the majors in a sustained way, however. “If you get some weak results, shares might trade weaker on that day, but I think investors are largely going to be able to brush that off,” Fernandez said.

On Friday, ExxonMobil reported first quarter earnings of $2.4 billion, down by half from the $4.65 billion it earned a year earlier, and down more than 60 percent from the fourth quarter. Spending rose to $6.9 billion, up 42 percent from the first quarter in 2018, due to the intensified drilling campaign in the Permian. That in turn helped boost upstream liquids production by 5 percent. Exxon’s Permian output grew by 140 percent year-on-year.

Exxon put the blame for its disappointing results on the poor market for refining. “Solid operating performance in the first quarter helped mitigate the impact of challenging Downstream and Chemical margin environments,” Exxon CEO Darren Woods said in a statement. Exxon’s downstream unit actually lost money in the quarter as low margins and heightened maintenance impacted earnings. In an effort to assuage investors’ concerns, the oil major hiked its quarterly dividend by 5 cents to 87 cents per share.

Chevron reported earnings of $2.6 billion in the first quarter, down more than a quarter from the $3.6 billion the company earned a year earlier, but still higher than Exxon’s result. Chevron’s explanation echoed that of its rival. “First quarter earnings declined from a year ago, largely due to lower crude oil prices and weaker downstream and chemicals margins,” Chevron CEO Michael Wirth said in a statement.

For Chevron, the earnings report was small news compared to its recent $33 billion bid for Anadarko Petroleum. “The combination of Anadarko’s high-quality assets and people with Chevron’s portfolio strengthens our leading position in the Permian, builds greater deepwater Gulf of Mexico capabilities and will grow our LNG business,” Wirth said. Occidental Petroleum is complicating the acquisition, but Chevron is viewed as the likely winner in the rare bidding war.

Meanwhile, Total SA reported earnings of $2.8 billion, down by only 4 percent from a year ago. The French oil giant was helped by the ramp up of a few key projects. “A decent start to the year,” analysts at RBC Capital Markets wrote, reiterating an “outperform” rating on the stock.

Related: Saudi Oil Minister: We Won’t Ramp Up Oil Production Soon

As mentioned, weak refining margins was the common thread in these reports. During the oil market downturn between 2014 and 2016, refining was an important cushion for the integrated companies, providing strong revenues that mitigated the losses from low crude oil prices. According to the Wall Street Journal, refining made up 34 percent of the combined net income for Exxon and Chevron over the last five years, and more than 50 percent in some years.

Those days are now gone. “They’re still making money, but the fat margins have disappeared,” Sandy Fielden, director of oil research for Morningstar Inc., told the WSJ.

One of the reasons for weaker refining margins this year is the shrinking discount for heavy oil. The supply losses in Venezuela, Mexico, Iran and mandatory production cuts in Canada have tightened up the heavy oil market. Narrower discounts cut into the profitability of refining heavy oil.

The discount of heavy Canadian oil, as well as WTI, relative to the more internationally-linked Brent, was especially pronounced at times last year due to pipeline bottlenecks. For instance, Mexico’s heavy Maya blend traded at an $8-per-barrel discount to Louisianan Light Sweet in the first quarter of 2018, but narrowed to a $4-per-barrel discount this year, according to the WSJ.

Analysts were not overly concerned about the trajectory of the majors. Oil prices are up sharply compared to the start of the year, which should fill the coffers of the majors. But, for now, investors are not impressed. Exxon saw its share price sink more than 2 percent on Friday.

By Nick Cunningham of Oilprice.com

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