Two giant multinational American oil companies (IOCs) reported significant growth in third quarter profits last week, suggesting hard times for oil companies may be coming to an end. These profits, however, may have come at an expensive price. Many oil companies cut long-term capital expenditures and sold off undeveloped assets to achieve a better balance sheet in the short-term.
This past Friday, October 27, ExxonMobil (NYSE:XOM) reported earnings of $3.97 billion, which is about $0.93 EPS on $66.16 billion of revenue. This came despite setbacks from Hurricane Harvey that, the company estimated, shaved $0.04 per share off its profits. Results exceeded market expectations and Exxon’s stock rose slightly after the report.
On the same day, Chevron (NYSE:CVX) reported earnings of $1.95 billion or $1.03 per share. The company wasn't significantly impacted by Hurricane Harvey, and, despite reporting higher earnings than it did for Q3 2016, Chevron missed expectations. Shares fell on Friday after the report. During the earnings call, Chevron explained that its efforts to cut costs are continuing and emphasized the spending cuts it has made to large-scale projects.
Both Exxon and Chevron have made significant cuts to large capital expenses and have invested more in U.S. shale oil. Exxon has steadily increased its presence in the Permian Basin and plans to increase its production there by 45% over the next four years. Chevron, meanwhile, holds 2 million acres worth of assets in the Permian Basin and plans to increase its drilling rigs to 20 by the end of 2018.
Both companies are creating an image of greater success, likely at the expense of longer-term development. Higher oil prices, coupled with cuts to long-term and large projects, make each of their income statement look better.
However, major IOCs have traditionally ensured their own long-term success and the supply of the world’s energy needs by continually spending significant amounts on exploration and development that will not produce for years. The biggest IOCs are seemingly abandoning this strategy—or at least neglecting it—for short-term share price boosts.
In five, ten or even 20 years this could lead to a serious undersupply of oil and untold negative effects on the stock prices of these very companies. (Since many of these IOCs now find primary profits in downstream, high crude oil prices in years to come may not be as beneficial for the IOCs as high prices once were.)
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