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How Exxon Mobil, Royal Dutch Shell, BP Are Affected by Low Oil Prices

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By Muhammad Ali Khawar on Aug 1, 2016 at 7:57 am EST

Just when you thought oil prices will rebound they got even worse. The last few weeks have been quite eventful for the oil and gas industry, with companies releasing their second-quarter earnings. The quarter hasn’t been as rewarding for integrated oil and gas majors.

The decline in crude oil price has persisted for quite a while now. West Texas Intermediate was down 0.50% at $41.40 per barrel, while Brent Crude was down 0.32% at $43.39 per barrel, earlier today.

Second-Quarter Results

Exxon Mobil reported a massive 58% decline in adjusted net income. The income clocked in at $1.7 billion, down from $4.1 billion in the same quarter last year — missing analysts’ expectations by a fair margin.

Chevron Corporation (NYSE:CVX), another major player in the oil market also disappointed investors, reporting a loss of $1.5 billion against profit of $571 million reported in the same period last year.

The picture was not much different in Europe either. Royal Dutch Shell’s net income plunged from $3.4 billion a year earlier to $0.2 billion in the recent quarter. BP plc, another European integrated oil company, saw its adjusted net income decline by 45% year-over-year. Shell reported its worst profits in the last 11 years, according to Bloomberg.

Factors Contributing to Weak Earnings

Low crude prices were the major reason behind weak earnings. Recall that oil prices had started to recover a couple of months back, which led many to believe that the glut may end soon.

The decline also comes due low activity in downstream business segment. Normally, companies offset losses in the upstream segment through increased activity in downstream segment. But most companies had already ramped up refinery production so much so that it created a glut. Even a strong summer demand was unable to lower the glut that had developed.

Chevron, in the past quarter, booked massive impairment charges, while BP was negatively affected by the Gulf of Mexico costs that inflated to around $60 billion. Similarly, Shell’s transaction with BG led to huge cash outlays.

What Happens Next

Prices may take time to recover so companies will look to reduce costs. Exxon is in the process to acquire Interoil, while BP has undertaken numerous investments. It has formed a partnership with Det Norske to form Aker BP in Norway, along with various other projects in pipeline.

Shell and Chevron are looking to expand into the natural gas space, as it can be used to generate electricity and enjoy the first-mover’s advantage.

While a recovery isn’t anywhere near, the companies are looking to cut costs and benefit from synergies, while maintaining their dividend payout. Hopefully, if and when crude recovers, the companies would not only be able to derive maximum benefits from their cost structures, but also boost earnings through other ventures.


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