Image Source: Exxon Mobil Corporation – First quarter 2019 earnings presentation
By Callum Turcan
Energy earnings season is upon us and several major oil & gas companies have just reported their first quarter results. Global crude pricing benchmarks tanked during the last three months of 2018 and only partially recovered during the first three months of 2019, which depressed upstream raw energy resource realizations for those with a large liquids production base (meaning those that produce more natural gas liquids, crude oil, and condensate than “dry” natural gas).
Chevron Corporation (CVX): The energy giant posted EPS of $1.39 during the first quarter, down from $1.90 in the same period last year. Weaker realized raw energy resource prices offset a 7% increase in its upstream production base. A common theme this earnings cycle involved weak downstream performance for American refiners as domestic crack spreads (refining margins) were lackluster. Chevron was no exception, which its first quarter downstream income coming in almost two-thirds below last year’s level.
At the beginning of May, Chevron closed its $350 million purchase of Petrobras’ (PBR) 110,000 barrel per day Pasadena refinery in Texas. That refinery comes along with over 5 million barrels of crude oil and refined product storage capacity. Most importantly, this asset operates in arguably the most economical downstream region in America (where domestic crack spreads are usually the strongest on a relative basis) due to U.S. Gulf Coast refineries having both ample access to international markets and cost-advantaged domestic crude supplies.
This purchase ties into Chevron’s upstream Permian Basin strategy as the Pasadena refinery is configured to refine light crude and Chevron needs to find an outlet for rising production volumes out of West Texas and Southeastern New Mexico. Chevron’s domestic upstream production base increased by over 150,000 barrels of oil equivalent net in the first quarter to over 880,000 BOE/d net, and a lot of that increase was due to rising light oil volumes.
We recently wrote up a couple of notes covering Chevron and its ongoing bidding war against Occidental Petroleum Corporation (OXY) for Anadarko Petroleum Corporation (APC), with the ultimate prize being Anadarko’s Permian Basin position. Here is a link to the first article (after Chevron announced it was buying Anadarko) and the second article (after Occidental attempted to buy Anadarko and Anadarko’s management team decided to reopen talks with Occidental) covering this event.
Exxon Mobil Corporation (XOM): Another giant in the Permian, Exxon Mobil posted EPS of $0.55 last quarter, down sharply from $1.09 in the same period last year. Its upstream production base grew by just over 2%, led by liquids production growth as its natural gas output moved lower as capital shifted towards liquids-rich opportunities. Exxon Mobil is targeting aggressive upstream volume growth out of the Permian Basin and like Chevron, is aware it needs to secure an outlet from rising light oil production streams. This was the impetus behind Exxon Mobil moving forward with a downstream development that will add another CDU (crude distillation unit) to its Beaumont refinery in Texas, increasing the complex’s refinery crude capacity by 250,000 barrels per day.
What was very disappointing to see was that Exxon Mobil posted a loss, that’s right, a loss at its downstream division during the first quarter. Sharply lower crack spreads combined with scheduled maintenance expenses pushed what usually is a very consistent profit generator into the red to the tune of $0.3 billion. Exxon Mobil’s chemical’s division was still profitable last quarter, earning the energy firm $0.5 billion, but that was still just half of what the division generated in the same period last year. Weakening margins and negative foreign exchange effects were cited as key reasons for the lackluster performance. Its upstream earnings declined by 18% year-over-year to $2.9 billion due to weaker realized prices and the absence of gains on asset sales.
BP plc (BP): The British energy giant BP posted an underlying cost replacement profit of $0.12 per share during the first quarter, down from $0.13 per share in the same period a year-ago (keep in mind this is per share, not per ADS). The company’s upstream production, excluding its stake in Rosneft (OJSCY), rose by 2% but weaker raw energy resource prices still shaved over 9% off its underlying upstream income last quarter on a year-over-year basis. Higher oil prices behooved Rosneft’s financial performance, tripling BP’s estimated share of the Russian firm’s earnings to $0.6 billion in the first quarter versus the same period last year.
Where BP performed very well, relatively speaking, was at its downstream division. While Exxon Mobil and Chevron saw their downstream incomes crater, BP’s declined by just $0.1 billion or 6% year-over-year to $1.7 billion last quarter. Management had this to say in BP’s prepared remarks;
“Looking to the Downstream. In fuels marketing, we continue to expand in new markets, adding more than 260 retail sites in the last 12 months. We have opened our first BP branded retail station in Shandong Province, China, through our joint venture with Dongming. This marks the start of our plan to add 1,000 new sites over the next five years to our existing network in China of more than 740 sites.”
On the upstream front, BP has been doing a tremendous job over the past few years bringing projects online and on-budget (occasionally beating expectations) all over the world (including developments in Trinidad & Tobago, Egypt, the U.S. Gulf of Mexico, the U.K., and elsewhere). Bringing new producing properties online is expected to add 900,000 BOE/d net to its 2016 production base by 2021. Most importantly, BP is actually generating consistent upstream production growth. Some of its peers, such as Exxon Mobil, have really struggled to offset output declines from mature fields. That hasn’t been the case for BP for some time. To keep the momentum going, BP purchased BHP Group Limited’s (BHP) unconventional upstream position in America for $10.5 billion last year. We will be monitoring the integration process going forward.
Royal Dutch Shell plc (RDS.A) (RDS.B): Shell posted EPS of $1.48 last quarter, up from $1.42 in the same period last year (those are per ADS figures). That was partially due to a 2% decline in its outstanding share count. On an adjusted basis, Shell’s bottom-line fell by 2% in the first quarter year-over-year, which was largely offset by the share buybacks. Management launched the next wave of Shell’s buyback program this earnings release, announcing plans to repurchase $2.75 billion additional shares through the end of July 2019. This is part of Shell’s plan to repurchase $25.0 billion of its shares through the end of 2020 to offset past dilution.
Unfortunately, Shell’s upstream production base slipped by 2% last quarter versus the same period a year-ago. Stronger natural gas realizations offset weaker crude oil realizations, enabling Shell to grow its adjusted upstream income in the first quarter. That also enabled its ‘Integrated Gas’ division to posted year-over-year adjusted income growth. Even Shell’s downstream division posted annual income growth, as like BP, it dodged the hurdles holding Exxon Mobil and Chevron back. Shell’s adjusted income fell last quarter year-over-year due to a large increase in corporate level costs which tend to be volatile on a quarterly basis.
Going forward, Shell is targeting upstream production growth from unconventional plays in North America (including the Permian Basin and the Duvernay), conventional offshore projects (including developments in the Gulf of Mexico and Brazil) and plans to support some of this growth through liquified natural gas investments. For instance, Shell sanctioned the LNG Canada project to ultimately provide an outlet for very cost-advantage natural gas production in Western Canada, where Shell has a very large unconventional upstream presence (with an eye on the Montney and Duvernay plays).
ConocoPhillips (COP): Known as the upstream super-independent, Conoco posted EPS of $1.60 in the first quarter of 2019, up sharply from $0.75 in the same period a year-ago. Excluding output from Libya due to the volatile nature of its investments in the North African country, which is currently engaged in a civil war, Conoco’s upstream production base climbed up by almost 0.1 million BOE/d net (good for 8% year-over-year growth) to over 1.3 million BOE/d net during the first quarter. That includes a favorable impact from net acquisition and divestment activity, but Conoco still posted very strong organic production growth of 5% year-over-year.
Over the past several years, Conoco has pursued a “shrink to grow” strategy where it shed less desired assets (uneconomical upstream natural gas assets in America, an outdated LNG export facility in Alaska, most of its oilsands operations in Canada save for the Surmont joint-venture with Total SA (TOT), and more recently, its offshore upstream operations in the U.K.) and terminated its deepwater exploration program to focus on the more lucrative growth opportunities it already had available. This has seen Conoco’s bottom-line and cash flow potential grow at constant realized raw energy resource prices, even though its production base moved lower, as it shifted towards more profitable upstream ventures.
Going forward, Conoco is pursuing a major upstream project in Alaska to develop the large Willow oil discovery and has embarked on several other developments in the state as well (such as GMT 2). These conventional endeavors are very economical, and during the worst of the downturn in oil pricing benchmarks (specifically from late-2014 to the end of 2017), Alaska was one of the few profitable assets Conoco owned. Management is also targeting upstream volume growth across Conoco’s extensive unconventional upstream operations in North America including the Eagle Ford, Permian Basin, Bakken/Three-Forks, and Montney plays. Conoco’s resource discovery program is appraising Louisiana’s Austin Chalk, an emerging play that the super-independent was able to buy into on the cheap.
Concluding Thoughts
West Texas Intermediate and Brent have rallied on geopolitical tensions and major supply concerns over the past few months, particularly as it relates to the potential for unplanned outages in Libya, Nigeria, Iran, and Venezuela. Combined with sharp output curtailments from the OPEC+ cartel and the potential for weaker than expected non-OPEC supply growth this year, on top of firm global demand growth, elevated global crude oil prices appear here to stay as we head into driving season.
Tickerized for our Energy ETF coverage.
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Callum Turcan does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.