Whatās Going On Here?US oil majors Chevron and Exxon Mobil reported third-quarter results late last week, following European rivals BP, Total, and Shell. And despite falling profits, all but Chevron were drippinā in finesse. What Does This Mean?Itās no secret that the price of a barrel of oil is lower now than it was this time last year. So when oil companies extract it at roughly the same cost as last year but sell it on at a lower price, itās only natural theyād make less profit. But some of the worldās largest oil companies ā known as āintegratedsā ā do a bit of everything: oil exploring, producing, and refining (turning crude oil into usable stuff like plastics). Their earnings, then, are at least partially hedged: when theyāre making less from oil sales, they can buy oil to refine at lower prices to boost that segmentās profit (tweet this). So even though Exxonās profit was 50% lower than a year ago, it beat investorsā expectations. Chevronās only fell 36%, but that was a bigger drop than forecast. Why Should I Care?For markets: Itās a buyerās market. A month ago, industry analysts were predicting oil companiesā third-quarter profit would be 30% lower than a year ago. That forecastās since fallen further. Given the vast sums oil companies spend on looking for and extracting oil, prolonged profit drops could put their high dividends and share buybacks at risk ā and tempt investors to look for a change. On the other hand, analysts expect utilities companies ā buyers of energy ā to have grown their profits by 6% last quarter. That might be thanks to their customersā consistent need for gas and electricity, no matter the state of the economy.
The bigger picture: Competition for capital. The worldās most profitable company, Saudi Aramco, will likely have completed its initial public offering next month, meaning investors will be able to buy and sell its shares on the stock market. Theyāll be comparing it to the current ā ahem ā oil field, and may look to sell shares of some in order to make room for Aramco in their portfolios. |