Is These Oil Producers’ Situation Dire?

Chevron (NYSE: CVX) and Exxon Mobil (NYSE: XOM) didn’t impress their investors following the publication of their earnings for the last quarter of 2013 and outlook for 2014. Given the decline in their stocks’ prices in the past several weeks, is these companies’ situation so dire? Let’s try and put in perspective these companies’ earnings reports and current outlook for 2014.

The good — production

Exxon’s production was down by 1.5% during the past year. But the decline in production was mostly in its natural gas operations, which fell by 4% in 2013, year over year. Exxon wasn’t the only company that reduced its natural gas operations. Chesapeake Energy (NYSE: CHK) changed direction in the past couple of years, and has been slowly cutting down its natural gas production: In 2013 the company’s natural gas production declined by roughly 4% and in 2014 , the company estimates its natural gas production will fall by 1%, year over year. Despite the decline in Exxon’s production in 2013, its management remains optimistic that the company’s production will rise in 2014 as several of its projects are expected to come to fruition, including projects in Argentina, Iraq, Canada and the Russian Arctic. The company also plans to increase its drilling in shale oil fields in the U.S.

Chevron’s production remained nearly unchanged in 2013: The company’s modest rise in natural gas production offset the moderate decline in oil production. In 2014, however, the company projects its production will increase as several of their projects are expects to start producing. E.g. Chevron’s Brazilian subsidiary and Petrobras started to produce crude oil from Papa-Terra’s floating production at the end of 2013. Let’s turn to these companies’ lack of growth in their capital spending in 2014.

The bad — capital expenditure

Exxon’s capital expenditure rose during 2013 by 6.7% to reach $42.5 billion. Roughly 10% of this amount or $4.3 billion was allocated towards acquisitions. But in 2014, the company is likely to maintain a similar amount of capex. Chevron’s capex sharply increased by over 22% in 2013, year over year, and reached $41.8 billion. Out of this amount, $4 billion were allotted towards new acquisitions. Chevron also plans to maintain its capital spending at $40 billion. But the lack of growth in capex doesn’t necessarily mean these companies will grow slower; this could suggest that there are fewer assets worth investing in at the current prices of oil. Moreover, this will allow these companies to keep their dividend payments and reduce the financial risk they may face.

Let’s turn to the one of the main uncertainties around these companies’ performance — commodities prices.

The uncertain — oil and gas prices

It’s no surprise that the progress of the prices of oil and natural gas could significantly affect the revenues and profit margins of oil and gas producers. During 2013, the price of WTI oil was roughly 4% higher than in 2012, while Brent oil price was 2.8% lower than in 2012. The U.S Energy Information Administration projects the price of oil (WTI) will decline to $93 per barrel and Brent oil to $105 per barrel. This will represent another 5% and 3.5% drop in the prices of WTI and Brent, respectively.

Moreover, the gap between Brent oil and WTI oil has narrowed during the past year. Nonetheless, the U.S Energy Information Administration projects the average gap between Brent and WTI, which is currently less than $10 a barrel, will rise to $12  a barrel. In comparison, the gap was, on average, $10.8 per barrel during 2013. If the EIA’s estimates are accurate, the higher gap between Brent and WTI will also improve Exxon and Chevron’s refineries margins. This, in turn, will increase these companies’ profit margins during 2014.  Therefore, even though prices are projected to decline in 2014, if the gap between Brent oil and WTI rises again, this could improve these oil producers’ profit margins from their refinery operations.

In the natural gas market, the situation is a different. Currently, the price of natural gas is very high, even for the winter season, at over $5 due to the colder than normal weather throughout the U.S. This could have some positive effect on the revenues of Chevron and Exxon Mobil in the first quarter of 2014. Moreover, during 2014, the EIA estimates natural gas will be 11% higher than its average price in 2013.  Thus, the higher price of natural gas could also positively affect the bottom line of these oil and gas producers.

In conclusion…

The situation for Exxon and Chevron might not be as dire as some investors or analysts suspect. These companies are facing difficulties in increasing their capital spending and their production in 2014. Moreover, the uncertainty around the progress of oil and gas prices and the premium of Brent oil over WTI will also play a role in these companies’ revenues and profit margins. But if the current estimates are accurate, then Exxon and Chevron might improve their performance in 2014, which could pull back their value.

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Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.