How Dire Is the Situation for These Oil Majors?

Chevron (CVX 1.88%) and ExxonMobil (XOM 1.50%) didn't impress investors following their earnings releases for the last quarter of 2013 and outlook for 2014. Given the decline in their stock prices in the past several weeks, is the situation becoming dire for these oil majors? Let's try to put this into perspective. 

The good -- production
ExxonMobil's production was down by 1.5% during the past year. But the decline in production was mostly in its natural gas operations, which fell by 4% in 2013, year over year. Exxon wasn't the only company that reduced its natural gas operations: Chesapeake Energy (CHKA.Q) changed direction in the past couple of years, and has been slowly cutting down its natural gas production. In 2013 the company's natural gas production declined by roughly 4%, and in 2014, the company estimates its natural gas production will fall by 1%, year over year. Despite the decline in Exxon's production in 2013, its management remains optimistic that the company's production will rise in 2014 as several of its projects are expected to come to fruition, including projects in Argentina, Iraq, Canada, and the Russian Arctic. The company also plans to increase its drilling in shale oil fields in the U.S. 

Chevron's production remained nearly unchanged in 2013. The company's modest rise in natural gas production offset the moderate decline in oil production. In 2014, however, the company projects its production will increase as several of its projects are expected to start producing. For example, Chevron's Brazilian subsidiary and Petrobras started to produce crude oil from Papa-Terra's floating production at the end of 2013.    

The bad -- capital expenditure
Exxon's capital expenditure rose during 2013 by 6.7% to reach $42.5 billion. Roughly 10% of this amount, or $4.3 billion was allocated toward acquisitions. But in 2014, the company is likely to maintain a similar amount of capex. Chevron's capex sharply increased by over 22% in 2013, year over year, and reached $41.8 billion. Out of this amount, $4 billion was allotted toward new acquisitions. Chevron also plans to maintain its capital spending at $40 billion. But the lack of growth in capex doesn't necessarily mean these companies will grow slower; this could suggest that there are fewer assets worth investing in at current oil prices. Moreover, it will allow these companies to keep their dividend payments and reduce the financial risk they may face.  

The uncertain -- oil and gas prices 
It's no surprise that the upward pressure on oil and natural gas prices could significantly affect the revenues and profit margins of oil and gas producers. During 2013, the price of WTI oil was roughly 4% higher than in 2012, while Brent oil was 2.8% lower than in 2012. The U.S. Energy Information Administration projects the price of WTI oil will decline to $93 per barrel and Brent to $105 per barrel. This will represent another 5% and 3.5% drop in the prices of WTI and Brent, respectively.  

Moreover, the gap between Brent oil and WTI oil has narrowed during the past year. Nonetheless, the EIA projects the average gap between Brent and WTI, which is currently less than $10 a barrel, will rise to $12 a barrel. In comparison, the gap was on average $10.8 per barrel during 2013. If the EIA's estimates are accurate, the higher gap between Brent and WTI will also improve Exxon's and Chevron's refineries margins. This, in turn, will increase their profit margins during 2014.   

In the natural gas market, the situation is different. Currently, the price of natural gas is relatively high, even for the winter season, at over $5 due to the colder-than-normal weather throughout the U.S. This could have some positive effect on the revenues of Chevron and ExxonMobil in the first quarter of 2014. Moreover, during 2014, the EIA estimates natural gas will be 11% higher than its average price in 2013, which could be a boon to their bottom lines. 

Final thoughts
The situation for Exxon and Chevron might not be as dire as some investors or analysts suspect. These companies are facing difficulties in increasing their capital spending and production in 2014. Moreover, the uncertainty around oil and gas prices and the premium of Brent oil over WTI will also play a role in their revenues and profit margins.