Three lessons for local firms from oil majors strong 2018 results

In the clearest indication yet of how resilient the world’s biggest oil producers have become, a 40 percent decline in the value of oil prices in the fourth quarter of 2018 did little to deter them from reporting strong results providing lessons for local oil companies.

Oil majors Shell, ExxonMobil, Total and Chevron booked strong results with some reporting earnings similar to 2014 when oil prices surged above $100 thereby beating expectations of most analysts on the back of strong investment in technology, diversifying markets and product offerings.

Total’s 2018 full year results shows that net profit rose largely as a result of increased production volumes. The French oil major said net profit for the October-December period was $1.13 billion, up from $1.02 billion a year earlier.

ExxonMobil reported Q4 earnings of US$6 billion, down from US$8.4 billion in the fourth quarter of 2017. Exxon’s liquids production in the fourth quarter rose by 4 percent from the prior-year quarter, driven by growth in the Permian. Oil-equivalent production was 4.010 million bpd in Q4, exceeding 4 million bpd for the first time in nearly two years.

“Our continued focus on long-term fundamentals and portfolio improvements position us well to grow shareholder value. ExxonMobil’s 2018 results further demonstrate our advantages in technology, scale and integration, providing a strong foundation to successfully compete across commodity price cycles,” said Darren Woods, chairman and CEO, ExxonMobil.

The decision to take position in shale fields played a significant role in the improved results. Diversification of investment profile will help local oil companies remain profitable in a low oil price environment,

Anglo-Dutch oil group, Shell posted full-year earnings of US$21.404 billion an increase of 36 percent from the previous year’s figures due to increased revenue from oil, gas, and liquefied natural gas (LNG).

Shell is the world’s largest oil trader, trading over 10 million barrels of oil a day. The company’s trading operations often help it offset large swings in oil prices and in some cases can generate large profits as it did this year.

But its diversified portfolio enabled it to make profit even when trading was weak in its biggest products. In 2018, trading of refined products such as gasoline and diesel was weaker than 2017, while crude oil trading was stronger and liquefied natural gas (LNG) trading gave a further boost. When its traditional markets didn’t hold too much promise, new markets in Oman and Brazil helped shore up results.

Nigeria’s emerging solar industry is ripe for investment but local oil firms are paying little attention. Shell may be the world’s biggest oil trader; it is seeing a future in solar and taking positions there. It is funding All On, an impact investment firm to take a position in Nigeria’s off-grid market, local oil companies could look at opportunities in the off grid space.

On its part, Chevron’s fourth-quarter earnings rose to US$3.7 billion from US$3.1 billion in Q4 2017. It also reported a record annual net oil-equivalent production of 2.93 million barrels per day for 2018, up by 7 percent on the year. For this year, Chevron is planning to further increase production by between 4 percent and 7 percent.

Diversification into shale fields lifted the company’s earnings and cash flow. Chevron generated $9.2 billion in cash flow from operations in the fourth quarter, up from $8.0 billion a year earlier. Its 2019 capital spending budget is going toward projects that can deliver cash within two years,

Chevron and ExxonMobil are tying their shale operations to logistics and refining arms that independents do not have.

“We’re going to be advantaged versus the rest of industry,” Exxon CEO Darren Woods said on an earnings call, noting the company’s close coupling of pipeline, logistics and oil refining operations to shale.

 

ISAAC ANYAOGU