Exploring Hydrocarbon Depletion
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Page added on February 2, 2013
It seems like Big Oil can weather most economic storms. In a difficult fourth quarter, with flat oil prices and a shale boom in the U.S. keeping natural gas in place, with the world’s largest economy contracting and China slowing, Exxon Mobil and Chevron handily beat profit expectations, despite mediocre revenue numbers and decent production figures. With mixed upstream results, both U.S. oil behemoths derived downstream strength from previously troubling refining margins coupled with asset sales; and, as has been the case for some time, chemicals continue to deliver.
Kicking it off with Exxon, which recently has been catching up to Apple in an attempt to regain its number one spot in terms of market capitalization, net income jumped 5.9% to $9.95 billion despite a similar decline in revenue, which closed the quarter at $115.2 billion. The world’s largest publicly traded oil company easily beat EPS estimates, earning $2.20 (compared with a $1.99 estimate), while sales came in just above Wall Street’s number.
Chevron, which has been the better of the two in terms of share performance over the past 12 months, saw net income soar 41.2% to $7.2 billion, but gained from a $1.4 billion gain from an asset exchange. In a per share basis, the second U.S. oil company by production earned $3.70, easily beating the $3.03 consensus call. Chevron grew revenue 1% to $60.5 billion, but disappointed Wall Street, which expected $63.1 billion.
At a time when the energy industry is questioning the integrated upstream/downstream model, seeing big names like ConocoPhillips and Hess shed their refining businesses to focus on higher-margin production operations, the big two of U.S. oil have been reaping the benefits of holding on to both sides. And it wasn’t just downstream refining: chemicals have been performing too.
Exxon’s fourth quarter illustrated the trend more clearly. Oil-equivalent production slid 5.2% to 4.29 million barrels per day, on the back of declines in both crude and natural gas liquids, and natural gas, which fell a dramatic 8.3% to 12.5 billion cubic feet per day. Upstream earnings, which produce the lion’s share of Exxon’s profits, slid $1.1 billion to $7.8 billion on lower liquid price realization.
On the flip side, downstream earnings surged, more than quadrupling to $1.8 billion. The vast majority of that, $1.2 billion, came from improved refining margins, along with volume and mix effects, which in past quarters had plagued Exxon and in part has pushed other energy companies to spin off their downstream units. Finally, to add another argument in favor of the integrated model, Exxon’s chemicals unit continues to grow, with earnings nearly doubling to $958 million on higher margins.
Chevron’s fourth quarter tells a similar story. While total production rose 1.1% to 2.67 million daily barrels of oil-equivalent production (the biggest boost came from natural gas which grew 5.8%, compared with liquids declining 1.1%), giving a substantial 19.5% jump to upstream earnings which came in at $6.9 billion, downstream performed brilliantly.
Solid refining margins helped Chevron’s downstream unit reverse a $538 million loss a year ago, with downstream earnings closing the fourth quarter at $925 million. While asset sales helped too, the company highlighted the performance of its 50% joint venture Chevron Phillips Chemical Company, which they book under downstream. Chevron also benefitted from international asset sales in the quarter.
What both oil giants’ fourth quarter earnings demonstrate is that the integrated model is alive and well. While it may be efficient only in scale, as exploration and production still represents the largest chunk of the companies and is clearly their cash-cow, solid fourth quarter performances in refining and chemical operations added to Chevron and Exxon’s bottom line.