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Colossal Fossils ‘Will Have Some Explaining to Do’ as Quarterly Profits Plunge 42%

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Financial media are predicting a devastating run of corporate reports from some of the world’s biggest fossil companies, with low oil prices, weak customer demand, and shrinking profit margins on chemical production hitting an industry whose investors are looking for higher payouts on their shares.

“The so-called supermajors—Exxon Mobil Corporation, Royal Dutch Shell Plc, Chevron Corporation, Total SA, and BP Plc—are expected to disclose a 42% plunge in third-quarter earnings, on average, when they post results this week,” Bloomberg reports [1]. “That drop-off is too steep to blame on the 18% decline in crude oil prices, which means executives will have some explaining to do.”

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Exxon, Shell, and BP “already have already taken steps to manage shareholder expectations by releasing limited data points on things like refinery repairs, asset sales, and hurricane impacts on offshore oil production,” the new agency adds. Exxon has already disclosed US$500 million in losses due to lower oil prices, Shell said its refineries and chemical plants were operating at only 90% of capacity, and BP warned investors not to expect an immediate increase in dividends. Yesterday, BP announced [3] a 40% drop in profits for the quarter.

One major worry for the bigger fossils is that their lavish investments in petrochemicals have failed to deliver the “high-growth opportunity” (or last-ditch lifeline [4]) they’ve been hoping for. Bloomberg warns the U.S. industry’s latest plan to invest $40 billion in Gulf Coast chemical plants will only create a glut in the market, driving down prices. “Current trends continue to suggest a prolonged downturn” in chemicals, thanks in part to Donald Trump’s trade war with China, said RBC Capital Markets analyst Biraj Borkhataria.

Then there’s the bigger-picture question the colossal fossils face. “In a world awash in crude and confronted with climate change, growth is a major conundrum for Big Oil. Should these companies be expanding or winding down?” Bloomberg asks. “Don’t expect major pronouncements on such existential issues, but executives may offer clues to their thinking during earnings conference calls when they’re quizzed about 2020 spending and progress toward asset disposal targets.”

Bloomberg also expects investors to look carefully at Exxon’s and Chevron’s plans to triple their shale oil and gas production in the U.S. Permian basin over the next few years. “Analysts will be keeping a close eye on how those companies avoid the pitfalls of smaller rivals stung by overambitious drilling programs, and how their performance stacks up against lofty targets,” write reporters Kevin Crowley and Kelly Gilblom. “Despite the production boom, investors have soured on shale because of poor performance by independent producers that burned through nearly $200 billion of cash in the past decade.”

Ultimately, investing in new production may not be the strategy investors want from the fossil sector. “In the new world of plentiful crude and anti-fossil fuel campaigns, increasing payouts and share buybacks are seen as key to retaining investors,” Bloomberg says. “While none of the five companies’ dividend programs are in jeopardy, investors are keen to see how sustainable they are when balanced against costly drilling and construction projects, such as Exxon’s $30-billion-a-year spending program, and Shell’s investments in lower-profit renewable power.”

Reuters cites [5] similar concerns for major shale producers Conoco Phillips and Concho Resources, with falling oil prices matched by a 31% drop for natural gas. The shale oil and gas industry has been “whipsawed this year by volatile pricing and investor demands for improved returns,” so that “oil and gas producers have cut drilling and slashed jobs amid worries over pricing outlooks.” The news agency lists Whiting Petroleum, Devon Energy, and PDC Energy cutting staff in recent months, while oilfield services companies Halliburton, Schlumberger, and Patterson-UTI Energy took equipment out of operation. Separate news stories have Halliburton cutting [6] 650 jobs and promising another $300 million in cost cuts, while Schlumberger shocked some investors by acknowledging [7] a $12.7-billion drop in the value of its business.

Poor financial results could also drive a wedge between fossil producers and the banks they count on to fund their operations. “Some banks believe they have too much [fossil] energy exposure and want to reduce some of this risk,” said [8] Ian Rainbolt, vice president of finance at Warwick Energy, described by the Financial Post as a private equity firm with upstream investments in Oklahoma and Texas.

“That is a threat to smaller companies, which are already struggling to find other methods of financing—such as issuing stock or bonds—as investors grow restless with years of poor returns in the shale sector, even as the United States has risen to become the world’s largest oil and gas producer,” the Post writes. “Reduced funding could slow growth in U.S. oil and gas production, and also threaten more bankruptcies in the sector. Bankruptcy filings among U.S. oil and gas producers are at levels not seen since 2016, when U.S. crude slumped to US$26 per barrel, according to law firm Haynes and Boone.”