The oil and gas industry saw a really eventful week, as companies posted their second quarter financial results for the fiscal 2016 (2QFY16) in the prior week. Most of the companies were battered by the adverse movement in oil prices in the last two years.
2016 started on a low for oil majors. In February, the US benchmark for crude oil, West Texas Intermediate (WTI) fell to its 12-year low and plunged to $27 per barrel. The second quarter saw some recovery in June but bearish trends have continued to haunt the market once again. Even mega giants such as Exxon Mobil Corporation (NYSE:XOM) and Chevron also came under the limelight on this occasion. We take a look at the financial results of the two oil majors and study their performance in the quarter.
Exxon’s Financial Results
Exxon Mobil, the world's largest publicly traded oil producer, reported lower-than-expected profits on July 29 before the opening bell. In the latest quarter, the major energy giant surprised and disappointed investors and shareholders as it saw a significant decline in earnings.
We start by taking a deep look at the company's revenues. During the summer, gasoline demand is usually at highest and thus companies such as Exxon and Chevron are expected to report strong earnings. The table below shows the historical and the recent revenues reported by Exxon.
As mentioned above, the demand for gasoline and other crude products during summer is highly robust and thus companies are able to generate higher revenues. In the last year same quarter, it posted revenue of $74.11 billion, while it reported the highest figure in 2QFY15.The trend seems to be repeating in this year.
Revenue in the latest quarter clocked in at $57.69 billion, beating the consensus expectation of $54.94 billion. The revenue was also up from the preceding quarter’s figure of $57.69 billion, once again showing the impact of rising demand. Over the last one year, Exxon has done well to beat the revenue estimates on all occasions.
While a rise in demand presents a good picture, the earnings are a much better metric to judge a company’s performance. The table below shows the earnings of Exxon in the latest quarter and in the previous quarters.
Exxon reported an adjusted net income of $1.7 billion. The company's income plunged significantly when compared to the same quarter last year's figure of $4.19 billion. Normally the company does well to beat expectations. But looking closely, we see that Exxon usually tends to fall short on the consensus expectations in the second quarter. This year it missed the analysts forecast of $2.60 billion and also missed the estimate last year in the same quarter.
Moreover, the quarter was impacted by monumental decline in crude oil prices. The upstream segment for the company reported earnings of $294 million falling from $1.7 billion in the same quarter last year.
When a company engages in both the upstream and downstream operations, it can mitigate the losses that may occur from one business segment. For instance when crude oil prices fall, exploration and production profits fall and hence companies are able to offset the losses from their downstream operations.
In the past, Exxon has managed to successfully implement this strategy. However, this quarter was different. When crude oil prices tumble, margins for refineries increase and thus they refine more. However, such lucrative profits has created a refinery glut in the US and squeezed margins substantially. Thus Exxon was not able to benefit as it has over the last few years.
As mentioned in Exxon’s press release, its downstream earnings in the latest quarter plunged from $825 million to $144 million. The company, as mentioned above, attributed the lower refining margins to the decline in earnings.
In order to reduce costs the company was able to slash its capital expenditures by 38% to $5.2 billion in the latest quarter. It also managed to sell $1 billion in assets this quarter. Despite the cut in costs, the company, in order to maintain shareholder confidence, increased its dividends to $0.75 per share representing an increase of 2.7% from the last year
Exxon has numerous projects in pipeline and it is also in talks to buy Interoil. During a period of a downturn, a larger size achieved through integration can play an integral part when it comes to reducing costs. This quarter, Exxon managed to start production at Point Thomson and was also able to expand a lubricant plant in China.
Chairman, president, and CEO of Exxon Mobil, Rex Tillerson, said: “While our financial results reflect a volatile industry environment, ExxonMobil remains focused on business fundamentals, cost discipline and advancing selective new investments across the value chain to extend our competitive advantage,” He added that “The corporation benefits from scale and integration, which provide the financial flexibility to invest in attractive opportunities and grow long-term shareholder value.”
Of the 28 analysts covering Exxon stock, nine rate it as a Buy, 13 assigned a Hold, while six suggested a Sell. The 12-month price estimate for the stock stands at $90.30, with a 3.1% return potential. Joh Herrlin from Societe Generale is the most bullish on the stock, rating it as a Buy and estimating the 12-month price at $105. On the other hand, Guy Baber from Piper Jaffray is the most bearish on the stock with a Neutral rating and a price estimate of $74.
Chevron Financial Results
Chevron Corporation (NYSE:CVX) reported its financial results alongside Exxon. Like Exxon, the results were battered by weak market fundamentals and shrinking refining margins. We start by looking at Chevron's revenues first.
Revenues in the latest quarter also continued its consistent trend of surpassing the Street's expectation. The company reported revenue of $29.28 billion, beating the consensus expectation of $28.64 billion. Chevron’s earnings, when compared to the same quarter last year, declined 27%. Exxon’s revenues, on the other hand, plummeted 22% managing to perform better than Chevron. On a quarter-over-quarter (QoQ) basis, Chevron managed to report a 24% surge in revenue compared to Exxon’s 18%.
In the latest quarter, Chevron reported an adjusted net income of $0.91 billion. It surprised investors this quarter as it managed to beat the expectations of Street. Exxon, however, missed the consensus expectation. Exxon reported a massive 60% crash in net income from the same quarter last year compared to Chevron’s decline of 41%. Chevron reported an increase in QoQ profit, while Exxon saw a decline in earnings.
Unlike Exxon, Chevron reported a loss in the upstream segment. Losses from the US upstream segment totaled $1.11 billion, while from the international operations were $1.35 billion. The losses from both the US and the international operations saw a decline from the same quarter last year. The main decline in earnings can be due to the lower price realized for crude oil. As mentioned in Chevron’s press release, the average price realized for crude oil and natural gas liquids was only $36 per barrel, down from $50 per barrel when compared to the same quarter last year.
The downstream segment for Chevron also saw declines. US downstream operations reported earnings of $537 million, down from $731 million. The international downstream segment earnings plunged from $2.23 billion in the same period last year to $741 million in the latest quarter.
In the latest quarter, Chevron managed to reduce its capital expenditures and operating expenditures by $6 billion when compared to the same quarter last year.
Chevron CEO John Watson stated regarding the results: “The second quarter results reflected lower oil prices and our ongoing adjustment to a lower oil price world.” Mr. Watson, despite reporting low earnings, raised optimism for the future. The company started its $54 billion Gorgon LNG project last quarter. The project was initially halted due to technical difficulties but some reports suggest that the production has resumed.
With production restarting at Gorgon and more key projects coming online, the company is likely to see positive cash flow in the future. Mr. Watson, regarding the issue, said: “We have restarted LNG production and cargo shipments at Gorgon and Angola LNG, and started up the third train at the Chuandongbei Project in China. Construction at our other key projects is progressing, and we expect additional start-ups later this year. As these projects continue to ramp up, they are expected to increase net cash generation in future quarters.”
Of the 27 analysts covering Chevron stock, 14 rated it as a Buy, while 13 assigned a Hold. The 12-month price estimate for the stock is $111.52 with a 10.5% return potential. Analyst Paul Y Cheng from Barclays is the most bullish on the stock, rating it an Equal Weight with a price target of $125. On the contrary, analysts Ian Reid from Macquarie is the most bearish, with a Neutral rating and a 12-month price estimate of $90.
When we compare the ratings of the two oil companies, we see that analysts are more bullish on Chevron rather than Exxon. Although Chevron has a lower profit than Exxon, its QoQ increase is particularly higher. In addition, the company has invested heavily in projects including that in LNG, which has favorable prospects in the future.