Mark Young, Hannah Mumby
Q2 2013 has proved to be a difficult quarter for the world’s major oil & gas companies. BP, Chevron (CVX), ExxonMobil (XOM), Royal Dutch Shell (RDS) and Total (TOT) have all experienced a testing time, as despite some positives in certain areas, results have generally been disappointing across the board. Evaluate Energy has examined the various reasons for this in both the upstream and downstream sectors, following some in-depth analysis of the latest data.
Oil production levels from this peer group as a whole have fallen remarkably this quarter. The combined performance of these five companies is shown below.
BP’s fall in quarterly production is the main reason the graph has fallen so sharply. This is the first quarter of results without production from TNK-BP, following its $55 billion deal that saw Rosneft take over the entity, and consequently BP’s production fell by around 786,000 barrels per day (bbl/d) from Q1. Following the sale, BP has invested heavily into Rosneft, but may have to wait for large scale future projects between the two to start producing (e.g. Arctic joint venture plans) before reaping significant rewards. Even if BP hadn’t sold TNK to Rosneft, it is clear the general trend would have been continuing downwards anyway.
A quick look at the reported upstream earnings for each company shows how much of an impact this fall in production and the widely reported drop in the companies’ realised liquids prices have had.
Again, the general trend is down, but on this reported, unadjusted* basis, BP and Total seem to have performed better in their respective upstream segments compared to last year. However, when the various special items are removed in Q2 2013, this is not the case; Total’s adjusted* upstream performance is in fact 9% worse. This decrease is caused by a fall in prices; Total’s realised oil price is down from $101.60 in Q2 2012 to $96.60 in Q2 2013, and its gas price fell from $7.10 to $6.62. The French giant actually reported a rise in total oil and gas production this quarter compared with Q2 last year - the first time this has happened in three years – but these lower commodity prices have dragged earnings down. For BP, Q2 2012 reported, non-adjusted figures are held back by a $1.5 billion impairment related to its US Shale assets and the suspension of the Liberty project in Alaska. If these effects are excluded, on an adjusted basis, BP’s upstream performance also declines, year on year.
For Royal Dutch Shell, the picture is the opposite way around. Shell has seen a large drop in reported earnings, which is chiefly due to $2.2 billion impairments in its US Shale sector, where over 80% of the company’s production is natural gas. If these impairments are removed, and we consider performance on an adjusted basis, outgoing CEO Peter Vossen seems to be leaving a steady ship for his 2014 replacement, Ben van Beurden, as on this adjusted basis, Shell has actually improved on second quarter upstream performance a year ago.
Chevron’s and ExxonMobil’s difficulties are not limited to setbacks experienced in the E&P segment. In the refining segment, Q2 2013 has also proved that being one of the super majors does not mean you are impervious to market pressures and the toughening up of environmental legislation.
The European contingent have improved performance, all showing increased adjusted earnings in Q2 2013, but Chevron and ExxonMobil have both come out of the quarter with a huge fall in downstream profits compared with Q2 2012. ExxonMobil’s 70% fall in profits shown here does not take into account the $5.3 billion gain achieved by restructuring its Japanese refining and marketing business in June last year, which would clearly exacerbate the situation further. This trend can be seen across the entire US refining industry. Stricter environmental regulations and higher tariffs in the country have affected everybody’s margins significantly. Using the Evaluate Energy database, we can expand the group to include the other major US refiners - HollyFrontier (HFC), Marathon Petroleum Corp (MPC), Phillips 66 (PSX), Tesoro Corp (TSO) and Valero Energy (VLO) – who all show a decline in adjusted earnings from Q2 last year.
This report was created using the Evaluate Energy database. Evaluate Energy provides efficient data solutions for oil and gas company benchmarking analysis. Our clients have access to 20+ years of historic oil and gas financial and operating database, extensive M&A, Refinery and E&P assets databases and emerging shale and unconventional offerings.
*Adjusted Earnings Definition: Earnings of each business segment, excluding the effects of all non-recurring, special items.
Please note that companies report their segmental earnings on many different bases: 1) Some companies report segmental earnings pre-tax (on the grounds that it is very difficult to allocate tax between segments), while others report post-tax; 2) Some companies report pre-interest (on the grounds that it is difficult to allocate net interest payments to each business segment) and others report post-interest; 3) Most companies report their segmental earnings before deducting SG&A because it is hard to allocate these general expenses to separate business segments. As a result of these differences, it is sometimes not possible to make direct comparisons between companies at the segmental level.