Still at sea
Oil recovery proves slippery for Exxon and Chevron
Exxon Mobil and Chevron are finding the oil-price recovery a slippery ride. The US oil majors, between them valued at more than $550 billion, posted messy secondquarter results on Friday despite a 30 per cent jump in the price of the black stuff during the period. Looking through the noise, falling supply should help establish a slow recovery into 2017.
The price of a barrel of Brent crude hit $50 at the end of June, up sharply from the January low of around $27 per barrel. Even so, average prices were lower during the second quarter than they were during the equivalent period of 2015, when the global oil benchmark traded in a range of $50-$70 per barrel.
That made comparisons tough, and Exxon and Chevron also both made less money turning oil into gasoline as refining margins fell across the industry. Combined, that fueled a 59 per cent drop in Exxon’s net income compared with a year earlier, with unexpected supply disruptions contributing to profit that fell well short of what analysts had expected. Chevron swung to a $1.5 billion loss as $2.8 billion of asset writedowns and other charges piled on top of a drop in earnings across the business.
There are reasons for optimism. Both energy giants’ upstream oil and gas segments earned more in the second quarter than they did in the first, thanks to rising prices and falling costs. Exxon also result, making it hard to say definitively how much the bank might suffer. The hope for boss Jes Staley is hat growth in Barclays’ next largest market — the United States — alleviates any pain.
UBS boss Sergio Ermotti would also benefit from a brisk US economy as well as a pick-up in Asia, which has historically accounted for as much as a fifth of revenue. His problem is that rich clients are keeping their wealth in cash and refusing to trade, limiting how much UBS can earn. Its wealth management businesses’ quarterly gross margins — which measure revenue as a proportion of assets under management — fell to their lowest levels since 2014. They would have been worse without the hike in US interest rates last year, which juiced net interest income. recently returned to the acquisition trail with a $2.5 billion deal to acquire Papa New Guinea-focused gas explorer InterOil — a sign that chief executive Rex Tillerson is looking ahead to secure new sources of production growth. A very modest drop in Exxon’s stock price and very little change to Chevron’s suggest investors are looking forward rather than back, too.
Crude prices have slipped from their 2016 highs in recent weeks, but should firm up heading into 2017 as billions of dollars of cuts in investment across the industry feed through into reduced output. Strong balance sheets and massive scale mean Exxon and Chevron can safely navigate stormy seas. Their mixed second-quarter showings, though, serve as a reminder that even when conditions are improving, turning a supertanker isn’t easy.
Following post-Brexit share price falls, Barclays trades at only half its 289 pence tangible book value per share. For devotees of the Gordon Growth Model beloved of bank analysts, this is consistent with a 7 per cent return on equity, an 11 per cent cost of equity and medium-term earnings growth of 3 per cent. If Brexit means Barclays can’t get its returns to snap up into double digits, then its shares won’t budge. If Asian economic growth fails to rebound, then the same dynamics will apply to UBS, which at least trades around book value.
The market could easily be wrong. But banks have stickier costs than they used to as a result of new regulations. So the Swiss group’s warning that difficult market conditions may persist is salutary. Both Barclays and UBS’ returns could well be on a long road to nowhere.