Random Update Of Profitability And Trends Among International Oil Companies

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There are two stories here. First the one from Platts. And then, the second half, a Motley Fool with another look at XOM.

This article, from Platts, is a bit tedious to read, mostly due to the typical Platts style for feature news. Nonetheless it has some interesting data.

This is the takeaway for me from this article: the IOCs have taken advantage of sustained high oil prices to move to "organic growth" if/when crude oil comes down in price.

The second takeaway: IOCs are losing ground in the oil market to national oil companies and to independents (a situation that has been masked to some extent by record high oil prices)

The IOCs include:

• XOM
• CVX
• Total
• Shell
• BP

Interestingly, after the COP-PSX spin-off, COP is not in the mix.

Sustained high prices for oil for the IOCs have meant that IOCs could:

• increase investment levels
• increase share dividends
• additional share buy-back schemes

But, Platts notes:

[The financial performance of the IOCs] does not show a simple linear improvement alongside these record high oil prices. Share buy-back schemes and higher dividends have in effect been a means of compensating shareholders for IOCs lack of growth, during a prolonged period of asset ratinalization and divestment.

Wow. 

The blog has noted some of the following in previous posts, particularly XOM's challenges..

In production terms, two trends:

• IOCs have failed to increase production over the last six years
• a rising proportion of gas as opposed to liquids

With regard to production:

• Four of the five IOCs all reported lower output in 2012 than previously; Shell was the rare exception but even so, its increase in 2012 was still significantly lower than its 2015 production (3.2 million boepd vs 3.470 million boepd)

With regard to gas:liquids ratio

• XOM: its reserve base is now more than 50% natural gas
• BP: its reserve base has inched up to 38% natural gas
• Chevron: alone among the five to keep its liquids output broadly stable over the last six years

Supply and Demand

• Over the past six years: supply from the big five has dropped about 1.75% of today's crude market
• Over the same time period: demand for crude oil has increased over 5% (from 85 million to almost 90 million bopd

Natural gas

• XOM and Total natural gas production easily outstripped pace of demand growth
• CVX and BP: natural gas output is lower than it was in 2006

The shift to gas and decline in liquids: profits are still huge, but the profits are not as buoyant as they otherwise could have been, if the IOCs had been more successful with crude oil

And then this bit of trivia:

"In October, Shell's ratio of gas to liquids output may be 50:50, but its exposure to the oil price is between 70-80%of all output because of oil-linked gas contracts." 

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And a final note from me (not from Platts): I don't recall the details, and I don't know where this stands now, but my worldview was that Warren Buffett bought a lot of COP (many years ago) just about the time it was later learned that COP had overpaid for huge west Pacific natural gas reserves; subsequently Buffett sold some/most/all of his COP. Now he takes a big stake in XOM with similar natural gas:crude oil challenges. Again, that's just my worldview and could be greatly mistaken.  

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From Motley Fool:

In the oil industry, we have a handy metric to determine how well a company is managing our money: return on capital employed, or ROCE. The ratio measures how much cash is going into the business versus how much is coming out. And this is important in industries that consume a great deal of capital such as airlines, semiconductors, or energy.

What Exxon has that its competitors don't is discipline. The company only allocates capital to its highest returning projects. If management can't find enough ventures that meet a very high bar for profitability, they will return excess capital to shareholders through dividends and buybacks. 

Exxon's rivals, in contrast as evident above, are a little too eager to redeploy that capital into lower return ventures. Guiding over a larger business empire may stoke boardroom egos, but merry executives never funded anybody's retirement. 

Sure, like its competitors, Exxon could grow faster. But that would require costly investments, and shareholders may be able to find better returns elsewhere. The fact that management acknowledges this reality is probably the main reason why Buffett chose Exxon Chief Executive Rex Tillerson over his peers.