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US supermajors to face up to 'grim reality' of falling profits

ExxonMobil and Chevron both saw a sharp fall in profits in the third quarter, but they are charting markedly different courses

ExxonMobil is using its size and strong balance sheet to continue investing, with relatively small spending cuts.

Chevron, by contrast, is cutting deeply to bring its spending into line with the price. Its strong portfolio of new projects sets it apart and will see it post stronger growth than its larger rival.

ExxonMobil saw its profits fall to $4.24bn in the third quarter - when oil prices languished below $50 a barrel (/b) - down 47% from a year earlier. Chevron's third quarter profits were hit harder by the low prices, with earnings down 64% from a year earlier to $2bn.

Both companies' US upstream businesses posted losses and were among the worst performing areas for the companies in spite of higher production. ExxonMobil's US business lost $442m in the third quarter. Chevron's US upstream segment lost $603m in the quarter and has lost more than $2.1bn through the first nine months of the year.

Plunging US natural gas prices also undercut both companies' earnings. ExxonMobil, the largest gas producer in the US, earned just $2.40/m British thermal units (Btu) in the quarter for its US gas. For Chevron, it was even lower at $1.96/m Btu.

Major Q3 financial results and production output

That has made US gas a target for cuts for both companies. "In the gas area, we've curtailed spending", Chevron's chief executive, John Watson, says. "We have really gotten our costs down very well in the Marcellus. We can compete with anybody there now. But nobody makes money, that I'm aware of, at $1.50 gas, which is where we are now."

Still, both companies continue to see US shale as an integral part of their upstream portfolios and a source of future growth. ExxonMobil added to its position in the Permian shale basin this summer and has also touted its position in the Bakken and Woodford shale, which is in the early stages of development. "We're very, very excited about all those opportunities; and [they] have significant value uplift potential for us", says Jeffrey Woodbury, an investor relations executive at ExxonMobil.

Strong refining and chemicals earnings helped prop up profits at both companies, proving again that the integrated model has provided a strong defense against low crude prices.

Chevron's downstream business earned $2.2bn, up 60% from 2014, while ExxonMobil's earned of $5.2bn, nearly twice the level from a year earlier. Downstream earning are likely to account for around two-thirds of the company's overall profits for 2015. Still, the company continued to shrink its refining business, selling off its troubled Torrance refinery in Los Angeles, California and the Chalmette refinery on the Gulf Coast this summer. The company has sold off more than 1m barrels a day (b/d) of refining capacity over the past decade.

Chevron is responding to the downturn with some of the sharpest spending cuts among the majors. It said that it now plans to spend $25bn to $28bn in 2016 and between $20bn and $24bn in 2017 and 2018. That is around 17% lower than previously planned for 2016 and 27% lower for 2017 and 2018. The spending cuts include layoffs of around 6,000 to 7,000 people.

The sharp cuts come on the heels of a period of heavy spending on major Australian LNG and US deep-water projects that saw Chevron's capital expenditures rise to ExxonMobil-like levels. That heavy spending was unsustainable and saw the company's capital expenditures and outlays to shareholders race ahead of cash inflows, even before the oil price dropped. The sharp drop in spending, though, has the company on track to be free cash flow positive by 2017 at an oil price of $58/b, according to Jason Gammel, an analyst at Jefferies, the investment bank.

At the same time, heavy investments have set the company up for a period of strong production growth. "We expect to see a significant inflection point over the next two years as a number of major capital projects move from being cash consumers to cash generators," Watson says.

First liquefied natural gas shipments from Gorgon have been delayed, but the company insists shipments will start before March 2016. It is also targeting a late 2016 start for the Wheatstone LNG project. Production from the Jack and St. Malo as well as Bigfoot fields in the Gulf of Mexico will start to ramp up in 2016.

Production is set to rise to around 3m barrels of oil equivalent a day (boe/d) at the end of 2017, about 15% higher than this year but slightly lower than the previous target of 3.1m boe/d, partly because lower spending will lead to steeper declines from mature fields. The production target is around 1m boe/d less than ExxonMobil's current production and short of Shell's expected post-BG takeover production of around 3.6m boe/d.

While these new barrels will be far less profitable than Chevron envisioned when they were sanctioned at oil prices of more than $100/b, they will provide a boost to the company even if oil prices remain low.

"This combination of growth and a balanced cash cycle is in our view unmatched in the sector," Jefferies' Gammel wrote in a research note.

ExxonMobil's sheer size gives it the ability to continue investing through the downturn and spending this year is on track to be around $31.4bn, just 7.5% lower than previously estimated. Analysts expect similar spending cuts next year, compared with the double-digit cuts of other international oil companies.

That will allow it to invest in production, but it means the company will have to continue borrowing to cover its dividend and share buyback programmes. Gammel, though, says that by 2017 it will need a Brent crude price of $66/b to cover its capital spending and dividend, about 14% higher than Chevron's cash breakeven.

At the same time, the company's production growth outlook is not as bright as its nearest rivals. Chevron has a strong pipeline of projects and Shell is set to takeover BG's growth-oriented portfolio that includes projects in Australian LNG and Brazil. Meanwhile, without an acquisition, ExxonMobil will struggle to see much production growth through the end of the decade. "Growth will be challenging beyond 2016," Jefferies' Gammel said about ExxonMobil's prospects, predicting yearly growth of just 0.4% from 2015 to 2020.

However it does have a major find off Guyana to work on; and it has won acreage offshore Mozambique with Russian state Rosneft.

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