Exxon, Chevron brace for dark times after earnings slump

Exxon Mobil Corp. and Chevron Corp., the biggest U.S. energy producers, hunkered down for a prolonged stretch of weak prices after posting their worst quarterly performances in several years.

Exxon reported its lowest profit since 2009 as crude prices fell twice as fast as it could slash expenses. Exxon is the world’s largest crude producer by market value. Chevron recorded its lowest profit in more than 12 years after the market rout forced $2.6 billion in asset writedowns and related charges. The companies’ shares fell to multiyear lows.

Stung by the worst market collapse since the financial crisis of 2008, oil explorers from The Hague to Calgary to Houston are firing employees, scaling back drilling, canceling rig contracts and reducing share buybacks to conserve cash. Chevron said the slump convinced it to lower its long-term outlook for crude prices.

“This is the beginning, not the end, of the writedown process,” said Paul Sankey, an energy analyst at Wolfe Research. “The biggest concern is that we’ll see weaker demand over the second half of the year.”

Oil entered its second bear market since mid-2014 this month as a flood of output from North American shale regions, the Persian Gulf and deep-water fields overwhelmed consumption by refiners and chemical producers.

Exxon and Chevron contributed to the avalanche of supply by increasing second-quarter crude output by 12 percent and 1.7 percent, respectively. Exxon expanded oil production in every region where it operates except Australia/Oceania. All of Chevron’s growth occurred in the U.S.

“Oil prices will be under downward pressure until there is evidence the glut is shrinking,” analysts at IHS Energy said in a note to clients. “This will not happen quickly unless prices fall even further from recent levels,” discouraging new drilling.

Shares of Exxon, which owns XTO Energy in Fort Worth, fell 4.6 percent to $79.21 in New York, the lowest closing price since June 2012. Chevron dropped 4.9 percent to $88.48, the lowest close since December 2010. The companies were the day’s worst performers on the stock market.

Exxon cut share repurchases for the current quarter in half to $500 million after net income fell to $4.19 billion, or $1 a share, from $8.78 billion, or $2.05, a year earlier, the Irving-based company said in a statement.

Refinery profits fattened by lower crude costs were more than offset by weaker results in the company’s primary business, oil and natural gas production, Exxon said. The company’s U.S. wells lost $47 million.

Chevron’s profit dropped to $571 million, or 30 cents a share, from $5.67 billion, or $2.98, a year earlier, the San Ramon, Calif.-based company said in a statement.

Chevron’s biggest business unit — oil and gas production — posted a loss as the second-largest U.S. energy company recorded a $1.96 billion writedown on assets and another $670 million charge for taxes and projects suspended because they no longer make economic sense.

“The writedowns will get worse into the end of the year as companies complete their end-of-the-year SEC filings,” Sankey said. “The market still looks very oversupplied with oil and we’re in peak demand season.”

Exxon Chairman and Chief Executive Officer Rex Tillerson was among the first to shrink spending as the crude rout began more than a year ago. After the company cut its budget by 9.3 percent in 2014, this year’s reduction may exceed the original 12 percent target, Jeff Woodbury, vice president of investor relations, said during a conference call with analysts.

“Chevron was a disaster; Exxon was a disappointment,” said Fadel Gheit, an analyst at Oppenheimer & Co. in New York. He rates the shares of both companies at the equivalent of a hold and owns both. “A rising tide lifts all ships, but when the tide goes down, all ships go down.”

This story was originally published July 31, 2015 at 5:26 PM with the headline "Exxon, Chevron brace for dark times after earnings slump."