This week, ExxonMobil and Chevron released quarterly results from Q1 2017. Both released numbers that topped consensus estimates. Some analysts have suggested the Exxon’s numbers can provide insight into the energy sector, as follows.
As the world’s largest publically traded oil and gas company, ExxonMobil can say a lot about the oil economy as a whole. We refer to Exxon as “integrated” due to the fact that it owns upstream, midstream, and downstream assets. In essence, they produce, transport, and refine oil and gas. This allows the company to become a proxy for those segments of the oil economy.
The company made $4 billion in Q1 2017, which is a 122% increase from Q1 2016 last year. Cash flow was nearly double this time around compared to last year as well, with cash flow from operations reaching $8.2 billion, versus the $4.8 billion from last year.
Heightened prices of gas and oil are the primary drivers of this growth. At the end of the first quarter of 2016, oil closed at $33.51 per barrel (of West Texas Intermediate). At the end of the first quarter this year, oil averaged $51.84 per barrel, an increase of 55% year-over-year.
Similarly, natural gas prices rose some 51% during this one year period as well. Exxon also happens to be the largest natural gas producer in the United States, meaning they were helped in this regard as well.
The surge in profits occurred in spite of the decline in oil-equivalent production – a decline of 4% year-over-year. Upstream earnings in the United States had a loss of $18 million. In Q1 2016, the sector had a loss of $832 million. Oil-production actually rose 2.6% during this time, while natural gas fell 5%. Outside the U.S., earnings were $2.3 billion.
Downstream earnings were $1.1 billion, a 21% increase from the first quarter of 2016. In the U.S., earnings grew to $292 million, a 56% increase from the equivalent quarter in the previous year. The higher earnings were the result of both higher margins and also higher volumes when compared to 2016.
So do these numbers from Exxon provide insight into the larger oil economy? Do they say anything about the upstream and downstream sectors?
It seems that $50 per barrel is a fair breakeven point for oil prices. When prices were about $30 a year ago, the upstream segment lost over $800 million. With the recovery of oil prices, that number swung to a loss of $18 million. Internationally, upstream profits rose from $756 million to $2.3 billion, though this was aided in part by the growth in natural gas production outside of the U.S.
This leads some analysts to speculate that oil producers with large international portfolios may outperform those who are purely concentrated in the United States. However, well-managed producers in the U.S. should still have generated higher cash flow than one year ago, if only because of the heighted oil prices. For natural gas producers, profitability should return with the rise in prices as well.
Traditionally, downstream refining does not perform well when oil prices are rising – margins tend to shrink significantly. However, Exxon reported higher margins in this sector than one year ago, which may be a positive indicator for refiners.
Despite the improved conditions in the market for these companies, many oil and gas companies are trading at similar prices to one year ago. The significant growth experienced this past year (in which energy led all other sectors), was washed away by a correction in Q1 as oil struggled to stay above $50 per barrel.
This leaves a lot of room for growth and has created many opportunities according to some analysts, starting with those that generated positive cash flows in Q1.
