Declining Profits and Soaring Project Costs

The biggest story this week in oil and gas is declining profits and production and soaring project costs for the supermajors as disappointing fourth-quarter 2013 earnings come in, among other bad news for the big boys.

According to the Wall Street Journal, Chevron, Exxon Mobil and Shell spent more than $120 billion in 2013 to boost oil and gas output, but production is declining and they’re having a hard time justifying these costs.

Exxon Mobil’s fourth-quarter earnings, released yesterday, were down largely due to a 1.8% drop in oil and gas output and project delays in Canada and Kazakhstan. Q4 2013 earnings came in at $8.4 billion, down 16.1% from the previous year when it was at $10 billion.  Revenues fell to $110.9 billion in Q4 2013, well below market expectations.  This is down from $114.7 billion in Q4 2012.  

Then we have Shell, which issued a “significant” profit warning on 17 January, and whose Q4 2013 earnings of $2.9 billion were down from $5.6 billion for the same quarter in 2012.  Shell blames high exploration costs and problems in Nigeria for the most part. Overall, profits were down 71% based on earnings statements released on Thursday. Shell’s oil production was down 5% in 2013 to 3.25 million barrels per day, largely because of issues in Nigeria and overall natural decline in its mature oil fields.  

The situation is forcing Shell and its new CEO, Ben van Beurden (only a month at the helm), to rethink its strategy and start disposing of assets and refocusing this year.

Among other things, Shell is suspending its Arctic drilling program in Alaska. This decision also comes on the heels of a US Court of Appeals decision on 22 January that said the US Department of Interior had violated the law when it auctioned off exploration blocks in Alaska’s Chukchi Sea. It could just mean a break for Shell in the Arctic, or it could derail exploration here entirely—we’re not sure yet. To date, Shell has invested well over $5 billion in its Arctic drilling projects and spent six years fighting legal challenges from environmental groups.

Shell’s new CEO has a new, more conservative vision that involves disposing of some burdensome assets and perhaps looking at some more efficient projects down the line.

“We have lost some momentum in operational delivery, and we can sharpen up in a number of areas,” van Beurden said in a statement. “2014 will be a year where we are changing emphasis, to improve our returns and cash flow performance.”

Shell has agreed to sell $2.1 billion in holdings in Australia and Brazil and is said to be considering divesting some of its troublesome Nigeria assets. There has also been talk that Shell might sell off all or part of its $6.3 billion stake in Woodside Petroleum Ltd. The company has already sold around $300 million in assets in Q4 2013, including a liquids-rich shale play in Ohio.

Chevron is set to announce its Q4 2013 and full-year earnings today, while the expectations here are not the declines we have seen in Shell and Exxon, Chevron, too, is spending a lot on monster projects. Chevron’s Gorgon LNG project, for instance, is expected to come in at $54 billion, or $20 billion more than originally expected.

So this year will be a definitive year for the supermajors and we’ll be watching the divestments—and acquisitions—very carefully. At the same time, we’ll also be looking more closely at some small- and mid-cap companies who are managing to balance risk and reward at a better pace. 

James Stafford

sourche: http://oilprice.com/Energy/Energy-General/This-Week-in-Oil-Gas-Declining-Profits-and-Soaring-Project-Costs.html