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US heavyweights feel the squeeze

Financial results suffer as erratic global politics and abundant supply sends energy prices tumbling

The full-year financial results of US oil and gas firms ExxonMobil, Chevron and ConocoPhillips confirmed what investors had previously feared—profits sent plunging by volatile energy prices and shrinking margins across the value chain.

ExxonMobil was arguably the worst afflicted. Total earnings in 2019 tumbled by $6.5bn over the previous full-year result to $14.34bn. The downstream and chemical divisions of the business felt the biggest squeeze, as narrowing North American differentials, reduced chemicals margins and scheduled maintenance lowered earnings by $5.4bn.

ExxonMobil did post a slight lift in upstream profit. But while net earnings by lifted $0.36bn over 2018, in reality the $3.7bn divestment of Norwegian assets helped subsidise sector performance which otherwise would have also recorded a year-on-year slide. Across the business, ExxonMobil completed $5bn in total divestment sales as the firm prioritised its more productive assets. 

“There is no doubt that 2019 was a challenging year for a number of our businesses,” said Darren Woods, ExxonMobil CEO, on an earnings call. “[We were at] near or at 10-year lows on price and margins for gas, refining and chemicals. Of course, it is important to understand what is driving this and the implications for our businesses and our investment plans.”

Liquids volumes grew by 5pc for ExxonMobil in 2019—primarily bolstered by US shale out of the Permian basin, which increased by 54pc year-on-year. But, while the firm is now targeting production additions from its Guyana portfolio in 2020, the start-up of its Carcara field in the Brazilian pre-salt and further output gains in the Permian, weakening returns from the upstream is a worrying trend. 

“It is going to be another volatile year and that is what we have been preaching for the last three to four years” Lance, ConocoPhillips

Equally, investors are aware of rising borrowings. In the last year, the overall debt pile increased by $9.1bn to $46.9bn as the company bankrolled key growth projects. Capex increased by $5.25bn year-on-year to $31.15bn and the firm is committed to raising this further to $33-35bn in 2020.

With earnings nosediving, ExxonMobil needs more than ever to convince increasingly sceptical investors that it can balance its capital spending, rising debt and the ability to produce strong returns. The major is banking on key growth projects like the Liza offshore Guyana project, which began producing first oil early in December, to generate better returns for investors. ExxonMobil says its growth strategy will generate an additional $40bn in value.

To reverse the downturn in the downstream and chemical sectors, ExxonMobil is also relying on the start-up of new facilities. Strategic investment in Rotterdam and Antwerp are projected to output high-value product margins, while a less extensive maintenance this year compared to 2019—which had the added complication of IMO 2020 preparations—should also offer a performance boost.

Chevron impairments

Chevron’s results saw a similar pattern. The firm posted a substantial $11.9bn year-on-year earnings drop—primarily the result of a $10.4bn impairment and write-off charge on upstream assets at Kitimat in Canada, in the US Appalachians, and Big Foot in the Gulf of Mexico.

“These were triggered in December by our decision to reduce funding to various gas-related opportunities, and to lower our long-term oil and gas price outlook,” said Pierre Breber, Chevron CFO, on an earnings call. “While we are disappointed with these charges, we are confident that we are making the right decisions to prioritise our capital on our most advantaged high-return assets.”

Volatile global energy prices and plentiful supply hurt Chevron’s earnings and caused the company to re-examine its portfolio, particularly gas projects in North America. In the fourth quarter, its realised crude price slumped by $9/bl year-on-year to $47/bl, while natural gas essentially halved to $1.10/’000ft³.

$46.9bn – ExxonMobil debt

Like ExxonMobil, Chevron continues to prioritise its most productive assets, even as growing output failed to offset all the ground lost to falling energy prices. Production grew by 5.4pc year-on-year in 2019, mainly from the Permian and ramp-ups at Wheatstone in Australia, Hebron in Canada and Big Foot.

In 2020, Chevron is projecting a further production boost of up to 3pc, on an expected oil price of $60/bl. But its operations in Venezuela remain uncertain while US sanctions on the Latin American nation persist and the Trump administration only allows the firm to remain in the country on a rolling basis.

Capital discipline and price sensitivities also remain key risks. Capex is essentially flat at $20bn in 2020 and the firm has stated that for every $1/bl change to Brent in 2020, Chevron is susceptible to a $450mn swing in cash flow.

Like ExxonMobil, divestment is already playing a role in streamlining the business. The firm divested $1.2bn of North Sea assets in 2019 and aims to complete the sell-off of its Azerbaijan and Colombian holdings in the first half of 2020. Where Chevron differs, though, is that it has managed to lower its debt pile to $27bn—paying down $7.8bn in debt in 2019. 

Earnings boost

Of the trio of US companies, ConocoPhillips was ostensibly the most successful—the only one to record an annual increase in earnings. The US independent recorded a $0.9bn rise in 2019 and boosted aggregate production by 63,000bl/d, again predominantly from the Lower 48 in the US.

“While it is early in the New Year and the sector is already off to another volatile start, it can certainly be tough on an industry or company if you are not built for it,” said Ryan Lance, ConocoPhillips CEO, on an earnings call. “Well, we are built for it with clear resilience to lower prices, full upside to higher prices and a shareholder friendly framework that works through the cycles.”  

The firm expects another challenging year and is taking a similarly cautious approach. Production is forecast to drop by between 35,000-75,000bl/d over 2019, the result of falling demand in the wake of the Coronavirus outbreak in China. 

ConocoPhillips also identified cash flow sensitivities that will likely impinge on or swell profits in 2020. A $1/bl change to Brent will affect company finances by a factor of $135-145mn, versus $40-50mn for WTI and $15-25mn for Canadian WCS.

For natural gas, the firm is projecting a $0.25/’000 ft³ Henry Hub variation in pricing to affect its potential earnings from North American gas by $45-55mn and the same oscillation in global gas price markers to have a $4-6mn impact on its international gas business. As a marker, in 2019 the firm’s realised prices stood at $64.30/bl for Brent, just over $57/bl for WTI and slightly above $2.60/mn Btu for Henry Hub.

“It is going to be another volatile year and that is what we have been preaching for the last three to four years because … any small changes in demand or changes in what Opec or others might do for the supply side will create that volatility that we have seen in spades,” said Lance.


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