Big Oil back to making billions

Many large firms’ profit margins are best in years

Big Oil is back to doing what it does best: raking in billions of dollars in profit.

The world’s largest oil companies this week posted some of their best earnings in years as they control costs and ride rising oil prices that are nearing $70 a barrel. Chevron on Friday said its first quarter profit surged by 36 percent from a year ago to $3.6 billion, its best report since the peak of the last oil boom in the summer of 2014. Royal Dutch Shell, which has its North American headquarters in Houston, did even better, reporting that its profit surged a stunning 67 percent to more than $5 billion, its best quarter since 2013.

To get a sense of the newfound strength of the industry, consider this: analysts and investors were deeply disappointed by the earnings of Exxon Mobil, which said it profits rose 16 percent to nearly $4.7 billion in the first three months of the year. Flat or falling earnings from refining and chemicals profits kept Exxon from generating even more extravagant returns.

“The state of the oil industry is pretty good right now,” said Guy Baber, an energy analyst at Piper Jaffray & Co. in Houston “That could persist for a while because global oil demand looks strong.”

The comeback for Big Oil is important to both the energy industry and Houston, where nearly every major oil company in the world has a large presence. Exxon Mobil, headquartered in Irving, has some 14,000 employees in the Houston area and Shell, an Anglo-Dutch company, counts 10,000. Chevron, based in California, employs 7,000 in the region.

Bigger profits not only support hiring and expansion, but also the many hundreds of companies that provide services, equipment and supplies to big oil companies, analysts said. Oil services companies, including Schlumberger, Halliburton and Baker Hughes, all reported profitable first quarters recently. ConocoPhillips, the Houston independent oil and gas company, said this week that its first quarter profit jumped more that 50 percent to nearly $900 miilion.

The improved earnings are another sign that the energy industry recovery is gaining momentum. U.S. oil production and exports are at record highs, and both Exxon and Chevron are investing billions of dollars to develop their holdings in the Permian Basin in West Texas. Shell recently authorized a multi-billion offshore project in the Gulf of Mexico and soon will launch its biggest Gulf oil platform ever.

‘Everyone’s earnings are up’

The majors also are exploring again. Chevron, Exxon Mobil, Shell, the British company BP and the French company Total have all announced significant offshore discoveries in recent months, in the Gulf of Mexico and North Sea, and off the coast of Guyana.

The strong profits are largely a product of higher oil prices, which are nearly $20 a barrel higher than a year ago and more than $40 above the low point of the recent oil bust — $26 a barrel in early 2016. Big Oil, like the rest of the industry, struggled during the industry downturn, reporting depressed revenues and profits, and, in some cases multibillon-dollar losses.

Crude oil settled at $68.10 a barrel in New York Friday.

“Obviously everyone’s earnings are up and cash flow is up because of oil prices,” said Pavel Molchanov, an energy analyst at Raymond James in Houston. “That’s a good thing and emphatically music to investors’ ears.”

Oil prices, however, aren’t the whole story. Oil companies are controlling costs, expanding carefully and becoming more efficient, which has allowed them to earn profits at less than $70 a barrel similar to those generated at $100 a barrel a few years ago.

Molchanov said the ability to execute these strategies is what will separate the companies in the future. He pointed to Chevron and Exxon Mobil, whose earnings sparked opposite reactions from investors. Chevron’s stock climbed nealry 2 percent Friday, while Exxon’s fell more than 3 percent.

Molchanov cited one key meagon sure that differentiated the two companies: oil and gas production. Chevron’s production rose 6 percent from last year while Exxon Mobil’s fell 6 percent, Exxon’s seventh production dip in the last eight quarters.

“It’s not often we see that glaring a disparity between the two largest companies,” Molchanov said. “It’s really a mirror image between these two companies that’s very striking.”

Volumes skyrocketed

Both Exxon Mobil and Chevron are investing heavily in shale oil in the Permian Basin, but Chevron is growing at a faster pace and doing so more efficiently, producing more oil with fewer drilling rigs. Exxon Mobil’s Permian production increased 18 percent, but Chevron said its volumes skyrocketed about 65 percent, growing by 100,000 barrels a day.

In addition to the Permian, Chevron executives credited the company’s new liquefied natural gas projects in Australia — Gor and Wheatstone — for increasing profits and revenues. Chevron’s first quarter revenues grew $37.8 billion, up 13 percent from a year ago.

“For the next few years we have a line of sight on very good growth,” added Chevron Chief Financial Officer Pat Yarrington.

Exxon Mobil’s first quarter revenues jumped 16 percent $68.2 billion from $58.7 billion a year earlier. Exxon Mobil Chief Executive Darren Woods on Friday opted to focus on the positives.

“Increased commodity prices, coupled with a focus on operating efficiently and strengthening our portfolio,” he said, “resulted in higher earnings and the highest quarterly cash flow from operations and asset sales since 2014.”

Exxon’s stock closed at $77.79 a share, down $3.07. Chevron’s stock gained $2.40 to close at $126.62