Oil companies’ safety net begins to show holes

REFINING profits that buttressed earnings for Exxon Mobil and Royal Dutch Shell as crude prices plunged are now slumping, further pressuring all of the world’s biggest oil companies as they move into 2016.

Global refining margins, the estimated profit from turning oil into fuel and diesel, fell 34 percent in the fourth quar- ter, the steepest decline in eight years, to $13.20 (R220) a barrel, BP’s data show. Every $1 drop cuts BP’s pretax adjusted earnings by $500 million a year.

The companies face a squeeze on processing profits as a mild winter curbs demand for heating oil and diesel, creating huge stockpiles in the US and Europe. That is a reverse from the past two years, a period when refining earnings doubled, and kicks away one of the remaining buffers for integrated oil giants grappling with crude prices at a 12-year low.

“It’s a bit of a double whammy, lower oil prices and refining margins starting to weaken,” Iain Reid, an analyst at Macquarie Capital in London, said. “The safety net is still there, but there are some holes in it now.”

Analysts have cut their fourth-quarter 2015 and firstquarter 2016 adjusted earnings a share forecasts in the past month for Exxon, Shell, Total, Eni, Statoil and Repsol, data compiled by Bloomberg show.

Oil’s slump of more than 70 percent over the past 18 months has resulted in 250 000 job losses in the industry globally, and more than $2.7 trillion of market value of oil companies being wiped out, an amount almost equal to France’s gross domestic product. There may be more pain to come as oil trades near $30 and refining margins keep narrowing.

For European refiners, average profit from producing gas oil, the most common fuel, was $9.50 a barrel above benchmark Brent crude in December, the narrowest for the time of the year since 2010, ICE Futures Europe data show.

Refining margins in northwest Europe fell to a two-year low of $10.90 in the fourth quarter, BP said. Those profits are often referred to as crack spreads, a rough measure of earnings based on the difference between the price of the fuel and that of crude.

Shell declined to comment. Chevron also declined to comment. – Bloomberg