February 9, 2018 Read More →

Latest Financials at Oil Majors Indicate Rising Shareholder Risk

Nasdaq.com:

Energy stocks have sold off over the past week, pulled down by both the broader financial turmoil and some poor earnings figures from top oil companies.

As of Thursday, benchmark oil prices are off more than 7 percent from their cyclical peaks reached a little more than a week earlier. The spike in volatility and the global financial selloff magnified the damage to the energy sector.

But some highly disappointing numbers from a few oil majors made things worse. ExxonMobil (XOM) and Chevron (CVX), in particular, spooked investors when they revealed fourth-quarter earnings that badly missed expectations. Chevron earned $0.72 per share in the fourth quarter and Exxon reported earnings of $0.88 per share, figures that were 40 percent and 15 percent lower than analysts’ expectations, respectively.

The disappointing numbers were, in part, the result of a slump in refining margins. During the depths of the oil market downturn, the downstream units for the integrated oil companies cushioned the blow of plunging oil prices. But with the market on the upswing, rising profits from crude oil sales are now being offset by a narrowing of refining margins.

Average refining margins from around the world dipped from $16.30 per barrel to $14.40 per barrel between the third and fourth quarters last year, according to data from BP. In the first quarter of 2018 to date, margins fell even further to $12.10 per barrel.

But for Exxon, at least, the trouble wasn’t all related to its downstream operations. Its upstream unit actually would have lost money if not for the U.S. tax overhaul. Free cash flow was negative in the fourth quarter, although Exxon’s leadership says that is because of one-off expenditures, such as a sizable acquisition in Mozambique. “All of these are key elements of our future growth potential,” Jeff Woodbury, a VP at Exxon, told shareholders on a conference call.

ExxonMobil’s production has been slowly eroding for years, and it dipped by 130,000 bpd in the fourth quarter from a year earlier.

Some analysts see the numbers as a red flag. “One way to put these earnings in perspective: Exxon is depending on rising global prices to earn a profit while having increasing difficulty in translating higher oil prices into higher profits,” Tom Sanzillo and Kathy Hipple of the Institute for Energy Economics and Financial Analysis, wrote in a commentary. “For long-term investors, this was Exxon’s 12th consecutive quarterly loss in its U.S. drilling business.”

More: What’s Behind The Energy Stock Selloff?

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