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Will Oil Majors Ever Recover?

The oil majors began reporting their third quarter earnings in recent days, and the figures do not look good. The three-month period ending in September saw oil prices sink to the low $40s per barrel and rebound to $50, but the losses continued to pile up for many of the largest oil companies.

Statoil started the earnings season on Thursday, reporting a loss much worse than analysts had expected. The quasi-state-owned Norwegian firm reported a loss of $432 million in the third quarter, lower than the $307 million loss it posted a year earlier. “The financial results were affected by low oil and gas prices, extensive planned maintenance and expensed exploration wells from previous periods,” Statoil’s CEO Eldar Saetre said in a statement. The poor results were due to lower oil prices and lower refining margins, but Statoil put on a brave face, arguing to shareholders that it is bringing down costs. It announced another cut to its capex guidance for 2016, lowering it from $12 billion to $11 billion.

French oil giant Total posted much better numbers on Friday, reporting $2.1 billion in adjusted net income, although that was down 25 percent from a year earlier. Total’s oil and gas production is also up 4 percent from the third quarter of 2015, and that combined with what the company says is “cost discipline” has allowed it to remain profitable throughout the oil bust of the past two years.

But some of the others did not fare as well. Italian oil company Eni reported a 484 million euro loss, compared to a 127 million euro loss a year earlier. Eni blamed lower oil and natural gas prices, along with some unexpected shutdowns. Refining margins also fell, hurting its downstream unit.

ConocoPhillips reported a $1 billion loss for the quarter, or about 84 cents per share, and revenue declined by 13 percent to $6.52 billion. Still, the company raised its production estimate for the year slightly, and its loss was not quite as bad as analysts expected.

ExxonMobil released numbers on Friday, and it earned $2.65 billion for the quarter, down 38 percent from a year earlier. Chevron also reported a $1.3 billion profit, a decline of about 37 percent from the third quarter in 2015.

There are some common themes throughout these earnings reports. First, obviously, earnings continue to suffer. Not only are oil prices still low, albeit up slightly from the lows earlier this year, but the oil majors are struggling to grow production. Severe cutbacks in spending, along with large asset sales over the past two years, are making it difficult to stop production from falling. Exxon saw output decline 3 percent over the past 12 months; Chevron’s was down 1 percent; a few others were flat or slightly up.

A second trend that emerged was declining earnings from refining, which makes sense because refining margins across the globe have plunged this year. Global refining margins were down 42 percent in the third quarter from a year earlier, according to BP. As refiners around the world took advantage of huge margins in 2015, they processed ever more volumes of gasoline and diesel, which ultimately led to narrowing margins this year. That took away the security blanket for so many oil majors. In the first nine months of this year, Exxon’s refining unit, for example, saw earnings fall 25 percent from the same period in 2015. Chevron’s downstream earnings fell by more than half. Downstream units are still more profitable for the oil majors than their upstream divisions, but they are not providing the buffer that they did last year.

Related: Full Scale Oil Price Recovery Unlikely As 5000 DUC’s May Come Online

Third, debt levels continue to rise. Exxon saw its total debt balloon by nearly 35 percent to $46.2 billion by the end of September. Chevron’s debt jumped by 27 percent to $45 billion. Debt for ConocoPhillips rose by 15 percent to $28.7 billion. These are worrying figures, and to the extent that some of the other majors managed to avoid rising debt or even whittled away at their indebtedness, it was because they sold off assets, providing one-time cash injections that could reduce long-term production.

Meanwhile, they are all stubbornly holding onto their dividend payout levels, a generous offering to shareholders when they are struggling to get out of negative territory. With high dividends and inadequate cash to cover those payouts and fund capex, debt is rising (see previous paragraph).

One final note. This could all be cyclical, but ExxonMobil offered a worrying note to shareholders. The oil major, in an acknowledgment of the investigations it is under by the New York Attorney General and the U.S. Securities and Exchange Commission, warned investors that it might have to write down some oil assets because future climate policy might make those reserves impossible to develop. Far from a cyclical problem, that disclosure is an early sign of a much more existential threat just over the horizon.

By Nick Cunningham for Oilprice.com

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