By Daniel Gilbert for Nasdaq.com
America's two biggest oil companies, Exxon Mobil Corp. and Chevron Corp., reported their worst profits from pumping oil and natural gas in more than a decade as low crude prices lopped off billions of dollars from their quarterly haul.
Exxon's second-quarter profit plunged 52% to $4.2 billion. The energy giant's division that pumps oil and gas accounted for just $2 billion of that, the lowest level since 2002. Chevron eked out a quarterly profit of $571 million thanks to its fuel-making refineries, which made up for the company's $2.2 billion loss from pumping oil and gas--the first such loss in nearly 20 years. Chevron lowered its outlook for crude prices and wrote down the value of its energy holdings by $2 billion.
The hard landing fell short of analysts' expectations, and Exxon and Chevron shares dropped nearly 5% Friday, making them the two worst performers in the Dow Jones Industrial Average.
Global oil prices have fallen more than 50% since last June, and settled Friday at $52 a barrel, the lowest since January. Exxon and Chevron have posted bigger profits during the 2009 downturn and earlier oil busts. But the world's biggest oil companies are ailing from more than low prices--problems that were masked when oil traded around $100 a barrel.
"The tide's going out and now we can see what was at the bottom," said Amy Myers Jaffe, executive director of energy and sustainability at the University of California-Davis.
The cost of unleashing new supplies of oil and gas has soared for the world's biggest oil companies, as they have spent enormous sums to harvest natural gas from Australia's remote waters and wring crude from Canada's oil sands, Ms. Jaffe noted.
Chevron is preparing to start up a massive gas-exporting project in Australia, whose costs have ballooned 45% to $ 54 billion. Exxon has boosted its oil output by scooping up thick, sludge-like crude from mines in the forests of Western Canada, a fuel that is expensive to unearth and sells for less than traditional oil. Royal Dutch Shell PLC on Thursday began wildcatting for oil in Alaska's Arctic waters, an undertaking that has already cost it more than $7 billion and it could take another decade before any oil flows.
As crude prices have tumbled over the past year, the three behemoths have been spending more to coax fuel from the ground and on dividends to shareholders than they have generated in cash. The companies are trying to conserve cash by laying off workers, negotiating for discounts with their suppliers and cutting spending.
Exxon plans to spend half as much on buying back its stock during the third quarter. Shell said this week it will cut 6,500 workers from its world-wide payroll. Chevron is reducing its workforce by 1,500, and didn't raise the dividend for the second quarter, as it typically does. Patricia Yarrington, Chevron's chief financial officer, said the company is committed to extending its streak of annual dividend increases for 27 years. "It is our number one priority," she said.
The companies are also seizing savings amid the downturn, particularly in the U.S. Jay Johnson, a Chevron executive vice president, said the company had been able to bring down the cost of tapping oil and gas by 20% to 50%, making it profitable to drill some new prospects even at today's oil prices. Exxon has operated at a lower cost on U.S. soil over the last three years than many smaller drillers, said Jeff Woodbury, head of investor relations. But both companies reported losses from their U.S. oil-and-gas drilling operations through the first half of the year, as have rivals BP PLC and ConocoPhillips.
The oil giants typically weather energy downturns because of their countercyclical businesses. When oil prices are high, they make richer profits from pumping crude out of the ground. When prices are low, they make more money from refining inexpensive crude into fuels like gasoline and diesel that they can sell at a greater profit.
Until this year, Exxon and Chevron typically made the vast majority of their profits from oil and gas production. Refining operations and chemical-making units have accounted for less than a quarter of Exxon's profits and barely 10% of Chevron's over the last 10 years. This year, however, is a different story.
Exxon made more money from refining crude and selling chemicals in the second quarter than it did from producing oil and gas--the first time since at least 2000. Chevron turned a $3 billion profit from its fuel-making plants, boosted by selling a stake in an Australia refiner, which accounted for the lion's share of its profits.
"I think they're largely benefiting from the integrated model," said Allen Good, a Morningstar Inc. analyst. Still, he said, they are spending more to generate cash than they used to.
Meanwhile, the price of crude continues to crater and many analysts don't see a rebound on the horizon.
IHS Energy, a research and consulting group, said the global oil glut is intensifying because the U.S., Saudi Arabia and Iraq have increased their collective output by 2 million barrels a day since November. Prices are poised to drop even further and could linger in a low $40-range for months before growing oil supplies stop swelling, according to a new report.
"Oil prices will be under downward pressure until there is evidence the glut is shrinking," IHS analysts wrote. " This will not happen quickly unless prices fall even further from recent levels."