Big Oil Gets Smaller as Chevron and Exxon Losses Mount to $9.4bn
Reprinted from the FT 31/07/2020
Industry leaders reveal the extent of damage from oil price collapse. The US supermajors’ poor results contrasted with better performance from Europe. ExxonMobil and Chevron both reported deep quarterly losses on Friday, as two of the US’s corporate titans revealed the trauma caused to their businesses by the worst oil price crash in decades. The companies swung to second-quarter losses of $8.3bn and $1.1bn respectively — down from profits of $4bn and $3.1bn each for the same period last year — as the price-plunge triggered by the pandemic and Saudi-Russian price war slashed revenue.
Exxon’s loss was its second in as many quarters, snapping decades of consecutive quarterly profits.
Chevron’s was its deepest in recent history.
“The demand destruction in the second quarter was unprecedented in the history of modern oil markets,” Neil Chapman, Exxon senior vice-president, told analysts on an investor call. “To put it in context, absolute demand fell to levels we haven’t seen in nearly 20 years,” he said. “We’ve never seen a decline with this magnitude of pace before, even relative to the historic periods of demand volatility following the global financial crisis and as far back as the 1970s oil and energy crisis.”
Chevron’s results were significantly worse than analysts had anticipated, knocking its shares by more than 4 per cent.
Exxon, having already warned investors to expect a poor quarterly filing, outperformed expectations. Its shares nonetheless fell by about 1 per cent as trading started.
“The past few months have presented unique challenges,” said Mike Wirth, Chevron chief executive. “The economic impact of the response to Covid-19 significantly reduced demand for our products and lowered commodity prices.”
Their huge losses followed the bumper earnings reported by tech giants on Thursday, underlining the weakness of the US oil and gas sector in the face of the coronavirus pandemic and other shifts in the global economy.
Energy was once the largest sector in the S&P 500. When we sit here today, it is less than 3 per cent Matt Stucky, portfolio manager, Northwestern Mutual Tech stocks now make up 27 per cent of the S&P 500 market capitalisation. Energy companies, once dominant, have fallen far behind. “Energy was once the largest sector in the S&P 500,” said Matt Stucky, portfolio manager at Milwaukee-based Northwestern Mutual. “When we sit here today, it is less than 3 per cent . . . What’s going to drive market trends is some of the largest tech companies.”
The US supermajors’ poor results also contrasted with the better performance from European rivals, where the trading arms of Total and Shell helped keep overall second-quarter earnings in the black.
However, like their European counterparts, both US companies’ upstream segments were hit hard, with Chevron reporting a loss of more than $6bn compared with a profit of $3.5bn in the same quarter last year. Exxon’s international upstream business swung to a loss of $1.7bn compared with a $3.3bn gain a year earlier. The two largest publicly traded oil producers in the world also both reported a drop in production, partly due to mandated supply cuts in Opec countries as well as their own US output cuts as prices crashed earlier this year. Like other oil producers, both Chevron and Exxon have sought to slash costs to cope with the downturn. Exxon managed to cut capital and exploration spending by about $2bn compared with the first quarter, and said it had “identified significant potential for additional reductions”. Chevron said its capital spending was on track to meet full-year guidance of $14bn, 20 per cent less than its original plan for the year. Operating costs fell only modestly, excluding $1bn in severance payments. Chevron also said it had fully written off the $2.6bn valuation of its assets in Venezuela, where the “overall political outlook” left it uncertain about ever recovering its investment. Total non-cash net charges for the company amounted to $5.2bn, partly due to hefty “revisions” to its commodity price outlook.
Analysts noted that the two companies diverged in how they were placed to handle further volatility, with Exxon’s dividend likely to come under pressure. “Chevron exited the worst quarter in recent history with a strong balance sheet and well-positioned to support its dividend even if the macro environment remains challenging,” said Jennifer Rowland, an analyst at Edward Jones. “Exxon on the other hand has been taking on additional debt for more than a year and is likely running out of capacity to continue to do so without jeopardising the strength of its balance sheet, which is a company crown jewel,” she said. “This calls into question how long Exxon can continue to fund its dividend if the macro environment doesn’t substantially improve.”