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Big Oil Companies Lose Billions, Prepare for Prolonged Pandemic - The Wall Street Journal

The Chevron El Segundo Refinery in California. The company lost $8.3 billion in the second quarter.

Photo: Kyle Grillot/Bloomberg News

Big oil companies endured one of their worst second quarters ever and are positioning themselves for prolonged pain as the coronavirus pandemic continues to sap global demand for fossil fuels.

Exxon XOM -1.11% Mobil Corp. posted its second consecutive quarterly loss for the first time this century on Friday, reporting a loss of $1.1 billion, compared with a profit of $3.1 billion a year ago. Exxon, the largest U.S. oil company, had not reported back-to-back losses for at least 22 years, according to Dow Jones Market Data, whose figures extend to 1998.

“The global pandemic and oversupply conditions significantly impacted our second quarter financial results with lower prices, margins, and sales volumes,” Exxon Chief Executive Darren Woods said in a statement.

Chevron Corp. CVX -3.98% said Friday it lost $8.3 billion in the second quarter, down from $4.3 billion in profits during the same period last year, its largest loss since at least 1998. It wrote down $5.7 billion in oil and gas properties, including $2.6 billion in Venezuela, citing uncertainty in the country ruled by strongman Nicolás Maduro. Chevron also said it lowered its internal estimates for future commodity prices.

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Royal Dutch Shell RDS.A -1.38% PLC and Total SA reported significant losses in the second quarter as well earlier this week, as the impact of the pandemic and a worsening long-term outlook for commodity prices spurred them to write down the value of their assets.

The dismal results are ratcheting up the problems for the oil giants, which were already struggling to attract investors even before the pandemic, as concerns over climate-change regulations and increasing competition from renewable energy and electric vehicles cloud the future for fossil fuels.

Holdings of oil and gas stocks by active money managers are at a 15 year low, according to investment bank Evercore ISI. BP BP -1.43% PLC, Shell and Total are all trading at 30-year lows relative to the overall S&P 500. Exxon is trading at its lowest level to the S&P 500 since 1977, according to the bank.

Many of the big oil companies have sought to retain investors despite slowing growth and profits over the past decade by paying out hefty dividends, but those payouts are proving hard to sustain during the pandemic.

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Crude prices have stabilized at around $40 a barrel, providing modest relief for the industry after U.S. oil prices briefly turned negative for the first time ever in April. But none of the world’s largest oil companies now foresee a rapid recovery as countries continue to struggle with containing the coronavirus.

Chevron Chief Executive Mike Wirth said his company faced an uncertain future for energy demand and couldn’t predict commodity prices with confidence right now.

“We expect a choppy economy and a choppy market,” Mr. Wirth said in an interview earlier this month. “It all depends on the virus and the policies enacted to respond to it.”

Stores of U.S. gasoline and diesel rose last week, according to government data released Wednesday. That indicates a slowdown in demand for transport fuels, which had started to rebound this summer and are key to the industry’s recovery, said data analytics firm Rystad Energy. Meanwhile, demand for jet fuel is recovering even more slowly than gasoline, and may not fully bounce back until 2023, according to Bank of America Corp.

U.S. oil prices closed below $40 per barrel Thursday for the first time in three weeks.

“Covid-19 is the elephant in the room and the U.S. death toll passing the milestone of 150,000 has spread concern to every kind of market, and commodities too,” said Rystad analyst Bjornar Tonhaugen.

A pump jack operating in front of a drilling rig owned by Exxon near Carlsbad, New Mexico. Some analysts predict Exxon may cut its dividend in 2021.

Photo: nick oxford/Reuters

For the entire second quarter, U.S. oil prices averaged $28 per barrel and Brent crude averaged about $33, according to Dow Jones Market Data, prices at which even the largest oil companies struggle to turn a profit, say analysts.

While major stock indices have recovered from April, when they fell to their lowest levels in years, oil and gas stocks have continued to lag despite the slight rebound in commodity prices, as some investors lose faith in the companies’ business model.

Many of the world’s largest energy companies, including Exxon and Chevron, have for years used an integrated business model, which has historically allowed them to weather most market conditions.

By owning oil and gas wells, along with the downstream plants to manufacture refined products like gasoline and chemicals, the companies were long able to capitalize in one sector of their business, regardless of whether oil prices were high or low.

But that model has failed to deliver strong returns for most of the past decade, as the world has faced a glut of fossil fuels triggered in part by America’s fracking boom, and it isn’t protecting the companies now, according to Evercore ISI analyst Doug Terreson.

The largest western oil companies invested about $1.2 trillion in growth projects over the last decade, according to Evercore, an investment banking advisory firm, while their combined debt increased by nearly $200 billion over the same period.

“It’s hard to support the idea that the integrated model has created a lot of value for shareholders,” Mr. Terreson said. “A broad-based reassessment of the capital management programs at the big oils is required at this point.”

Oil companies have been forced to take dramatic action to shore up their finances in recent months, including cutting tens of billions of dollars from their budgets and laying off thousands of employees.

Exxon, which had previously disclosed a 30% cut to capital expenditures in 2020, said on Friday that it has “identified significant potential for additional reductions” and is now conducting a comprehensive review of its business, adding that it would provide details when plans are finalized.

Shell has been among the most aggressive, deciding in April to cut its dividend for the first time since World War II to avoid having to borrow to fund it.

Shell reported a second-quarter loss of $18.4 billion on Thursday, which included a $16.8 billion write-down, while French giant Total posted a $8.4 billion loss including a $8.1 billion write-down. Both companies report net income attributable to shareholders, a proxy for net profits. ConocoPhillips also posted a $1 billion loss Thursday. BP PLC reports Tuesday.

Exxon and Chevron have promised they will maintain their dividends, viewed by many investors as the most attractive part of owning their stocks. But both companies have also taken on more debt this year. Some analysts predict Exxon may be forced to cut its dividend in 2021 if market conditions don’t recover.

Exxon’s dividend payments cost the company almost $15 billion per year. The company’s debt grew by $8.8 billion in the quarter, according to Goldman Sach Group Inc., which said Exxon will need oil prices around $75 per barrel in 2021 to cover its dividend payments from cash flow. Exxon said Friday it wouldn’t take on additional debt.

Dan Pickering, chief investment officer of energy investment firm Pickering Energy Partners LP, said the industry can survive at $40 oil but needs significantly higher prices to thrive. According to Mr. Pickering, who said he holds small positions in Exxon and Chevron, oil companies will have to continue cost-cutting for the foreseeable future.

“You’ve got to assume that this is the world we’re going to be in, Mr. Pickering said. “And, if this is the world we’re going to be in, the cost structure is too high.”

Write to Christopher M. Matthews at christopher.matthews@wsj.com

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