International oil majors were burned but also warmed by low oil prices in Q2; and their new projects are moving forward
The second quarter has been tough for international oil majors like ExxonMobil (ticker: XOM), Chevron (ticker: CVX) and Royal Dutch Shell (ticker: RDSA), but a silver lining of sorts did present itself.
Across all three companies, the reason given for the dramatic fall in profits was the same: low oil prices.
Exxon reported second quarter earnings of $4.2 billion, down 52% from the same quarter last year when the company generated $8.8 billion, according to XOM’s Q2 release. Chevron reported net income of $571 million after $2.6 billion of impairments and other charges, more than offsetting asset sales of $1.8 billion. In Q2’14 CVX reported $5.7 billion of net income. Shell reported net income of $3.4 billion compared with $5.1 billion in the same period last year.
“Our quarterly results reflect the disparate impacts of the current commodity price environment,” said Rex Tillerson, chairman and CEO of ExxonMobil. John Watson, chairman and CEO of Chevron said, “Our upstream businesses were particularly hard hit, as lower prices reduced revenues and triggered impairments and other charges.” Shell’s earnings release also cited lower oil prices for lower profit from the company’s upstream sector.
Downstream is the bright spot
All three companies announced that their downstream businesses were performing well. Lower oil prices cut both ways for integrated oil majors. While low prices hurt upstream, they deliver better margins downstream.
For XOM, downstream generated $1.5 billion, up $0.8 billion from the second quarter of 2014. According to the company’s release, stronger margins increased earnings by $1.1 billion. The company’s chemical operations reported earnings of $1.2 billion, $0.4 billion higher than in the same period of last year.
Chevron’s downstream operations reported revenue of $3.0 billion, compared to just $0.7 billion in the second quarter of 2014. Shell also reported $3.0 billion in earnings from the company’s downstream business, up from $2.6 billion from the same period last year.
During Shell’s earnings conference call, Shell CFO Simon Henry said, “The return on capital in the downstream was 15% over the last 12 months. We’ve seen positive cash generation from our U.S. shale business this year. Even with $2.08 gas prices and $40-odd WTI.”
Majors are moving forward on new projects
Even as oil prices take a bite out of revenue streams for oil companies, majors like Shell, ExxonMobil and Chevron remained focused on the road ahead.
Yesterday, Shell announced that it only needs its Fennica icebreaker to join its fleet in the Arctic before it begins drilling for resources off the coast of Alaska. The ship, which has been the subject of a great deal of controversy, made its way past protesters in Oregon after repairs yesterday.
Thirteen members of Greenpeace USA hung from a bridge over the Willamette River and kayakers converged on the Fennica as the ship made its way toward the Pacific Ocean.
The U.S. Geological Survey estimates U.S. Arctic offshore reserves at 26 billion barrels of recoverable oil and 130 Tcf of natural gas. Shell officials have said the resources in place offshore Alaska are some of the most prolific hydrocarbon basins yet to be developed.
During the company’s conference call, Shell CEO Ben van Beurden said that the project in Alaska remains on track despite the hiccups with Fennica. “We are making initial preparations and we are planning to drill the well. We have one well plan for this season over the next weeks, months. So expect the results somewhere in September,” he said.
Chevron, meanwhile, continues to work on its Gorgon LNG project in Western Australia, the importance of which cannot be overstated, according to a note from Raymond James. There is some uncertainty around when the project will make its first shipments, but the good news, according to Raymond James, “is that Chevron’s volumes at Gorgon are 75% contracted, leaving only modest exposure to the spot market.”
Exxon’s Kearl oil sands expansion project in Alberta, Canada, started ahead of schedule, according to the company’s Q2 release, reaching a capacity of 130 MBOPD of bitumen. During the company’s conference call, Jeff Woodbury, XOM vice president of investor relations, said that the first phase of the project was producing around 100 MBOPD, while Phase 2 was producing 30 MBOPD.
“Phased development of the Kearl resource enabled us to draw significant earnings from the initial development project and capture lower capital costs and operating efficiencies,” said Woodbury. “Total Kearl production averaged 130 MBOPD in the second quarter and is ultimately expected to reach 220 MBOPD.”