Can Oil Companies Spend Their Way Out of Industry Headwinds?

Chevron

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Shares of Chevron Corp. (NYSE:CVX) fell as much as 2 percent in early trading on Friday after the integrated oil and gas company reported third-quarter financial results. The company reported sales and operating revenues of $57 billion, up from $56 billion a year ago and slightly below the mean analyst estimate of $58.14 billion. Earnings fell about 4.7 percent on the year to $5 billion, or $2.56 per diluted share, also missing the mean analyst estimate of $2.71 per share.

“Our third quarter earnings were down from a year ago,” Chevron CEO John Watson said in the report. The reduction primarily reflected lower margins for refined products in the quarter, he added. Indeed, year over year, downstream earnings — those made from refining, processing, and purifying crude oil and raw natural gas — fell from $689 million to $380 million, a nearly 45 percent contraction.

Meanwhile, upstream earnings — those made from exploration and production — contracted less than 1 percent to about $5.1 billion. “All other” losses narrowed from $575 million to $522 million on the year. These charges mostly consist of unfavorable foreign currency effects, employee benefits and compensation expenses, and other corporate charges.

All told it was an underwhelming performance of the oil major, especially given that investors were looking for more evidence of the growth that has helped propel the stock higher against a fairly low-growth backdrop.

While Chevron’s growth engine may have sputtered in the third quarter, there’s a lot to look forward to down the pipeline.

“We continue to make good progress on our major capital projects,” Watson said in the earnings report. “Construction continues, and important milestones are being reached, on our Gorgon and Wheatstone LNG projects in Australia. Important interim construction goals have been recently reached for our Jack/St. Malo and Big Foot deepwater projects in the Gulf of Mexico, in preparation for their project start-ups scheduled for late 2014. We are also moving forward on the development of our liquids-rich unconventional properties in the United States.”

All told, capital and exploratory expenditures (read: Chevron’s investments in its future) are up about 27 percent on the year at $28.9 billion. These expenditures include resource acquisition in Australia, the Permian Basin, and the contested Kurdistan region of Iraq. Upstream investments accounted for 92 percent of total company capital expenditures in the first nine months of the year.

In the U.S., Exxon reported an average sale price per barrel of crude oil and natural gas liquids of $97, up from $91 a year ago. The average sale price of natural gas was $3.23 per thousand cubic feet, compared with $2.63 last year. Net oil-equivalent production was 655,000 barrels per day in the quarter, up by 3 percent on the year.

Internationally, the average sale price for a barrel of crude oil and natural gas liquids was $104, up from $98 a year ago. Natural gas sold for $5.88 per thousand cubic feet, compared with $6.03 last year. Production of 1.93 million barrels per day was up 3 percent on the year.

Turning back downstream, Chevron reported that earnings reductions both the U.S. and abroad were the result of lower margins on refined product sales. In the U.S., earnings were also eroded by higher operating expenses for repairs and maintenance activities.

Exxon Mobil Corp. (NYSE:XOM), Chevron’s primary U.S.-based competitor, reported third-quarter earnings earlier this week that were slightly more favorable. The oil major posted revenue of $112.4 billion versus analyst expectations of $107.4 billion and last year’s results of $115.1 billion for the same period. Exxon Mobil’s earnings per share for the quarter came in at $1.79 versus expectations of $1.77 and last year’s figure of $2.09. Exxon’s profit fell 18 percent to $7.78 billion from $9.57 billion a year ago.

Chairman and CEO Rex Tillerson said in the company’s earnings report: “Production of oil and natural gas increased from a year earlier, as new projects were brought on line and maintenance-related downtime decreased. Significantly weaker refining margins as a result of increased industry capacity negatively impacted Exxon Mobil’s downstream earnings.”

Exxon’s oil production increased 1.5 percent year over year in the third quarter. Oil companies are under increasing pressure to spend more money to drill in inhospitable locations while collecting fewer barrels for their efforts. According to a report from Barclays released at the beginning of the summer, oil companies will spend $678 billion globally this year. That figure is a 10 percent increase from 2012.

Between 1985 and 1999, global oil production grew 25 percent while spending increased by 40 percent, according to the Barclays report. In the years since 1999, oil production has increased another 25 percent, but spending has grown a whopping 640 percent in that time.

BP (NYSE:BP) kicked off earnings for oil and gas companies at the beginning of the week. BP reported consolidated underlying replacement cost profit — an accounting method that adjusts for the constantly fluctuating price of oil, similar to “last in, first out” — fell 26 percent on the year to $3.7 billion. Underlying earnings per share fell 26 percent on the year to about 20 cents. On a replacement-cost basis, adjusted earnings of $1.17 per American depository share beat the mean analyst estimate of $1.

BP also announced that it was hiking its dividend 5.6 percent, to 9.5 cents per share, and that it would be selling off another $10 billion in assets before the end of 2015, with most of the proceeds going toward share repurchases. BP previously announced an $8 billion share repurchase program — this program was funded largely by the $12 billion sale of BP’s stake in TNK-BP — of which $3.8 billion was completed by October 25.

Don’t Miss: Exxon Mobil Is Feeling the Pressure of High Drilling Costs.