The biggest oil companies are failing to increase earnings as crude trades near a nine-month low, production wanes and costs rise.
For only the second time since 2009, Royal Dutch Shell Plc, Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), BP Plc (BP/) and Total SA (FP) will all report lower quarterly profit when they announce earnings in the coming week, analysts’ estimates show. The group, which is investing a record $155 billion this year to bolster output, is disappointing investors: the companies’ shares have gained an average 2 percent this year as the Standard & Poor’s 500 Index jumped 11 percent.
“It’s going to be a very rough ride for the majors,” said Fadel Gheit, an analyst at Oppenheimer & Co. in New York who rates Exxon the equivalent of a hold. “If oil prices go down from here, no major integrated oil company will beat the S&P. We cannot hope they’ll be able to squeeze costs faster than falling oil prices.”
Benchmark Brent crude, used to price two-thirds of global sales, has dropped 9 percent this year to $101 a barrel as fracking technology opens wells in the U.S., prompting BP to predict the nation may top Saudi Arabia as the biggest producer of oil and liquid fuels. Goldman Sachs Group Inc. this week cut its forecast for average Brent prices in 2013 to $100 from $110 as supply grows.
At the same time, producing oil and natural gas is becoming harder for the world’s largest energy companies. Output at the five so-called supermajors reached its zenith in 2004 at 16.9 million barrels a day of oil equivalent. Production has slipped 7 percent since then to 15.7 million barrels last year, data compiled by Bloomberg show.
“The recent fall in oil prices is hardly likely to change sentiment toward this group of companies, whilst capital intensity has continued to rise as industry inflation continues,” Iain Reid, an analyst at Jefferies Group LLC in London, said in an e-mailed note to investors. “The global majors have as a group been a poor investment for some time.”
The U.S. will surpass Russia and Saudi Arabia this year to become the largest liquid fuel producer, BP said Jan 16. Liquids output, which includes oil, natural gas liquids and biofuels, will be boosted in the U.S. by tight oil extracted by the same technology that sparked a boom in shale gas.
The quest for new deposits to replace shrinking established fields is costing a record amount this year and all five companies have pledged to maintain or increase capital expenditure to bolster output. BP Chief Executive Officer Bob Dudley said in February that the inflation rate for oilfield services and supplies is running at about 10 percent a year.
Exxon reports first-quarter earnings today. The Irving, Texas-based company will post net income of $9.25 billion, compared with $9.45 billion a year earlier, according to the average of four estimates compiled by Bloomberg. Chevron will say net income fell to $5.83 billion after $6.47 billion a year earlier, according to Bloomberg data.
In Europe, analysts estimate that Total’s adjusted profit fell 5.7 percent to $2.99 billion. BP will say next week that profit in the first quarter slipped to $3.47 billion from $4.8 billion a year earlier, and Royal Dutch Shell Plc (RDSA) will say on May 2 that profit slid to $6.6 billion from $7.28 billion, Bloomberg data show.
Lower prices are also squeezing margins. Brent crude declined 4.9 percent from a year earlier to average $112.64 a barrel in the first quarter. New York-traded West Texas Intermediate, the U.S. benchmark, fell 8.4 percent to $94.36. U.S. gas prices gained 39 percent from a decade low to average $3.48 per million British thermal units.
Occidental Petroleum Corp. (OXY), the largest oil producer in the continental U.S., announced in February it was seeking a successor for CEO Stephen Chazen after less than two years on the job as the company lost a fifth of its market value last year on rising costs and lower-than-expected production growth.
BP and Total have focused on selling off less profitable operations and emphasized frontier exploration, where the payoffs from new discoveries are biggest.
“It’s now apparent to the majors that you need a high- quality portfolio to maintain earnings,” said Jason Kenney, an analyst at Banco Santander SA (SAN) in Edinburgh. “We’re in a period of inflation in the sector, and there’s value leakage in every spot along the chain.”
While profits from selling crude oil are falling, the business of turning crude into gasoline and other products has improved. Global refining margins were $17.80 a barrel in the first quarter compared with $14.75 a year earlier, according to BP’s refining marker margin.
Marathon Oil Corp. (MRO) and ConocoPhillips (COP) have spun off their refining business to add to their share prices. The biggest oil producers may now also have to try something radical to reward their shareholders, Oppenheimer’s Gheit said.
“Companies will have to look outside of the box to create value,” said Gheit. “It won’t be as simple as it has been for the past two years. Rising oil prices can be the tide that lifts all boats, but it will also bring them back down again.”
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