It's earnings season, and a rash of big oil companies just put in their reports, and most of them fell on the results.
In this week's episode of the Industry Focus: Energy podcast, host Sarah Priestley and Motley Fool Canada contributor Taylor Muckerman dive into the results from Royal Dutch Shell (NYSE:RDS-A) (NYSE:RDS-B), ConocoPhillips (NYSE:COP), Total (NYSE:TOT), Chevron (NYSE:CVX), and ExxonMobil (NYSE:XOM). Shell put in some solid numbers, but its dividend increase is a little worrying for a commodity producer. Exxon dropped a whopping 6% after its lackluster earnings report, and its troubles might be just getting started. Chevron is leaving analysts scratching their heads after the company missed on cash flow expectations -- and then proceeded to increase its dividend. Tune in to find out about these stories and more.
A full transcript follows the video.
This video was recorded on Feb. 15, 2018.
Sarah Priestley: Welcome to Industry Focus, the show that dives into a different sector of the stock market every day. Today, we're talking Energy and Industrials. It's Thursday, the 15th of February, and we're going to be discussing big oil earnings. I'm your host, Sarah Priestley, and joining me in the studio is Motley Fool Canada premium analyst and all-around nice guy, Taylor Muckerman.
Taylor Muckerman: Hopefully I don't finish last.
Priestley: [laughs] How are you doing today?
Muckerman: I'm great! How are you?
Priestley: I'm good. We're finally having some warmer weather, which is nice. It's teasing us.
Muckerman: I know, until Saturday, then it's 30.
Priestley: So, the start of February saw a rash of reporting from the world's largest oil companies, and today we're going to be reviewing them -- the good, the bad, and the ugly. To provide some context, it's important to remember that expectations were super high going into this because of the rise in crude oil prices that we saw last year. Which did help, generally, but we saw rising profits upstream, but narrowing refining margins, generally. Bumpy year for cash flow. Cash flow was its highest level since before the slump and helped by drastic cost-cutting that we've seen universally. And because of all of this, we're seeing management start talking about growth. That's great. Despite some of this, though, a lot of the stocks that we're discussing -- in fact, I think all of them -- are down, they've been sold off a little since earnings. And partly, the culprit is the broader downturn in the market that we're seeing.
Muckerman: Yeah, oil prices have pulled back, for sure.
Priestley: Then, also, our bad and ugly culprits -- super scientific categories -- Chevron and Exxon -- kind of spooked investors when they missed the mark a little. First, we're going to start with the good. We have Royal Dutch Shell, ConocoPhillips, and Total. They performed pretty well. The market seemed fairly pleased with their earnings. We'll start with Shell. Very strong Q4 earnings. Year over year increase in earnings for all three business segments. What did you make of the results?
Muckerman: This company, when you talk about Chevron and Exxon coming up as the bad and they ugly, interesting to see Shell as an integrated oil company up there at the top of the heap, because, you didn't mention, refining earnings being crimped a little bit by higher oil prices. But, Shell, a little bit more international, not as exposed to the United States, so they're reaping slightly higher prices with Brent crude than WTI. But, pretty nice results, especially not too late after they made that huge acquisition of BG Group.
Priestley: Absolutely. Their adjusted earnings were up $4.4 billion from $1.8 billion last year. Their production volume is down 7%. That's not what we're seeing across the board. Generally, the production volume seemed to be up, because people are getting greedy.
Muckerman: Yeah. You see the U.S. producers that are more exposed there, for sure, other than Exxon.
Priestley: And one thing that we're seeing across the board is oil companies starting to return value to shareholders. I think Shell has one of the highest yields, even though I don't think they announced any major changes like we're seeing with some of the other oil companies, but they do have one of the highest yields of the big oil giants.
Muckerman: Yeah. It always makes me a little nervous with commodity companies increasing the dividend. Maybe just leave it where it is, because, you commit yourself to that capital, and shareholders hate to see a dividend cut, and you open yourself up to that by raising the dividend payout. Maybe crimp down on some of the debt that they've got. They did just make a huge acquisition, so maybe keep some more cash on hand in case you have some writedowns, or something happens with that acquisition that you didn't foresee. Or, maybe just buy back some shares if you think the company is going to do better. But, dividends always worry me a little bit. Not the fact that there is a dividend, but continued dividend increases at the slightest sign of a good thing. It's not like they've been doing well for years. They've just finally turned a corner because oil prices are higher, and now all of the sudden they're going to raise the dividend, and they're not the only one. I think Pioneer Natural Resources, a U.S. exploration production company, announced a higher dividend as well. And I think there's a few others, but I don't want to just start rambling off names without knowing for sure. But, I do know, I'm a little cautious when it comes to producers raising the dividend. Statoil was another one.
Priestley: I think you're exactly right, and I think there's somewhat of a beauty contest going on among the oil companies now for investors' hard-earned dollars. I don't know. We'll see. I think you're exactly right. People should be cautioned by the whole GE story, though, very recently, what happens when something that has become such a dividend stalwart starts to take down their dividend.
Muckerman: Yeah, Kinder Morgan a couple of years ago cut their dividend, and the stock fell off a cliff. And that was after it had already sold off from lower oil prices. So, it's certainly something to be considerate about. You look at the returns of these companies over the long-term. And the dividend, they need it, because the returns just aren't there from a shareholder perspective on the stock side of things for these massive companies. So, dividend is a huge part of the story, but you also can't expect it to continue to increase.
Priestley: Yeah, 100%. Second up in our good category, we have ConocoPhillips. Expectations going into this report we were extremely high. The company did have its highest quarterly net profit in three years, and management become quite specific about growth opportunities. But, as we just talked about, one good quarter does not make the perfect year.
Muckerman: Yeah, when oil prices go up 20% in a quarter, it's going to have some positive effects.
Priestley: Yeah, exactly. This was all while rising prices, so they had $46 a barrel average this year, $33 last year in Q4. Overall, I think the blended average was $10 higher for barrels last year from this year.
Muckerman: Yeah. I looked at the oil price, WTI started the quarter in October at around $50 per barrel, ended the year at $60 a barrel. It looks like it peaked recently at $66 a barrel at the end of January, and now it's back down to $60. So, up 20% in the quarter. Up 10% to start the year. And then retreated back roughly 11%-12% in the last two weeks after you see the U.S. continue to increase production.
Priestley: Yeah, this is a scary sign. So, adjusted earnings for Philips were ahead of analyst estimates, $0.5 billion, Q4, full-year results $0.7 billion compared to last year's $3.3 billion loss.
Muckerman: Yeah, whoops.
Priestley: So, it's not hard to do well when you're lapping those comparisons. But they increased production 3%. They had a fantastic cash flow, which is something that we're seeing people really focus on. All analyst comments I've seen are including cash flow at the minute because it was just such a surprise quarter. And, again, increasing shareholder returns. They're doing buybacks of $2 billion, you'll be pleased. However, dividend is up 7.5%, which is a huge increase. So, I think they're looking to drive growth from their shale base production, Eagle Ford and Permian Basin. That will be in interesting, to see how that plays out next year.
Muckerman: Yeah. That's where everybody's dumping money in. You look at Pioneer, the Permian is their sole focus going forward, it seems, because they said they're going to sell off all non-Permian assets, including Eagle Ford assets, which, that was the belle of the ball a couple of years ago. Now the Permian is taking the reins there. Interesting to see a company sell out of other shale assets that were assumedly performing to solely concentrate on one basin, especially a company the size of Pioneer. But, U.S. shale, everyone is back on board. Rig counts are up, and cost per barrel to produce is down.
Priestley: Yeah. I think their cash flow neutral position is at $40 a barrel, which is pretty good. They're reducing debt, which is obviously, as you said, a good use of their resources.
Muckerman: Yeah, I appreciate that.
Priestley: But what people didn't like was the fact that they're increasing spending to up the production in these regions. Third in our good category, we have French oil giant Total. Revenues were up 12% year over year. Decreased production costs led to solid bottom line performance, too. Their full-year earnings were up 39%. So, fantastic year. They really are the belle of the ball.
Muckerman: Yeah, and they have their renewable energy exposure with SunPower.
Priestley: Absolutely. Gas and Renewable operating income, that segment, was up 100% in Q4.
Muckerman: Yeah, solid.
Priestley: And again, pre-dividend break-even with them is $30 a barrel.
Muckerman: So, about half of where we're at right now.
Muckerman: You scratch your head and start to wonder why companies are producing so much oil these days.
Priestley: But, like a lot of the other oil companies trying to court all these investors, dividend is up 10% over the next three years, and they're buying back $5 billion worth of shares. So, I think, to some degree, that's a little bit more conservative than what we're seeing. But like you said, I think they're leaping at good news when it should really be a little pat on the back.
Muckerman: Get while the getting's good.
Priestley: Absolutely. So, the bad, or, I think a more apt description for this company would probably just be meh, shrugged shoulders, was Chevron. Chevron basically missed expectations specifically on cash flow, despite announcing an increase in its quarterly dividend, the same as everything else where we've seen investors were just not impressed.
Muckerman: They missed out on cash flow while increasing the dividend. Brilliant.
Priestley: I know. It's craziness. Good management, though.
Muckerman: Well, that comes on the heels of the CEO making a comment, "We are in a cyclical commodity business. Capital discipline always matters. Cost always matters." And missing on cash flow expectations while raising the dividend.
Priestley: Show, don't tell.
Muckerman: Yeah, makes a lot of sense.
Priestley: They deferred taxes. The whole tax reform has had a big impact on both Chevron and Exxon. But when you take that out, the benefit that that gave, they're just not doing too well. Their cash flow break-even is at $50 a barrel.
Muckerman: A little higher.
Priestley: Total was $30. There's some issues there. Earnings of $3.1 billion, but $1.8 billion was just from tax reform.
Muckerman: The one-time tax reform benefit, yeah. Give all that new cash away.
Priestley: Yeah, exactly. As we discussed at the top, the whole theme of this is, upstream is doing well, downstream isn't doing so well. I think they had falling profits in the California refining business. They also had some charges related to the hurricane season that we've seen recently. Which, again, those are one-time charges. But this one-time boon that they've had for tax doesn't really mitigate that. So, oil and gas production rose almost 3% with them. I think that's thanks, actually, to projects that they have in Australia as opposed to the U.S. I suppose we're going to see that change this year.
Muckerman: Yeah, they're exposed more internationally than some of the companies that we've talked about, for sure. A lot of LNG projects in Australia.
Priestley: Our final stock falls into our ugly category, which may not be entirely fair, but, Exxon shares fell almost 6% after reporting. That was the stock's biggest one-day drop in five years. Exxon reported adjusted Q4 earnings, which exclude the tax benefit they got from the tax reform of $0.88 per share. Analysts had been expecting $1.04, hence the sell-off. The bigger issue for them was probably cash flow. Operating cash flow excluding assets from their sale proceed failed to cover capital spending and investments. And that's a huge issue for Exxon, because they've traditionally been the safer oil stock to put your money in, because they've generally been very cash-rich. So, this first sign of an issue spooked investors a lot.
Muckerman: Especially when they commit to spending more than $50 billion in the U.S. over the next few years.
Priestley: Made it into the president's speech, right? [laughs]
Muckerman: Yeah, as the camera immediately panned to Rex Tillerson, the former CEO of ExxonMobil, now Secretary of State. And you think, oh, well, it all has to do with tax reform, they're going to spend all this money because they're going to keep more money. But, then you look deeper and you see that their production in the U.S. is falling, and the share price is down 7% over the last 10 years. Maybe they're ramping up spending because they're one of the few companies in the United States that isn't increasing production without spending a ton more money. So, again, maybe they just got caught sleeping at the wheel on U.S. shale production, thinking it was too small of an opportunity to really move the needle for them. Come to find out, it's the biggest story in oil for the last three to five years.
Priestley: It seems hard to believe that they're slow to that party.
Muckerman: No doubt. They're saying they're going to triple their Permian production over the next several years, which doesn't bode well for oil prices, if everyone else continues to produce the same or more. Especially with demand forecasts not really keeping up with supply forecasts. So, they'd better get that break-even price down and hope that somebody falls off the map, that Libya doesn't start producing more oil, that Venezuela doesn't get their act together. Because you could see oil prices retreat back down to where they were in the $40-50 range pretty quickly.
Priestley: You're exactly right. I think Libya and Nigeria have, I don't want to say solved, but they've definitely improved the security issues that they were having before, so we're starting to see those come back online in a big way. And as you said, it's a dangerous balancing act, and it's teetering a little bit. But, yes, exactly as you commented on, they're tripling production in the Permian Basin of West Texas and New Mexico and spending $50 billion in the U.S. in the next five years.
Muckerman: That's a lot of money.
Priestley: It's a huge amount of money. It'll be interesting to watch. Production was down 2%, four million barrels per day. Interesting story, and definitely a position that they're not used to being in. They are the largest publicly traded oil company, I think, is that right?
Muckerman: Yes, for sure. They were the largest company in the world for a while until, obviously, the share price retreated 7% in the last decade, and you have companies like Apple continuing to produce positive returns. I don't know if we said, but isn't this the third straight year that their revenue or income from the U.S. has gone down? 12 straight quarters.
Priestley: 12th straight consecutive quarter that their drilling business lost money, yeah.
Muckerman: Yeah, in the U.S. So, great job over there at ExxonMobil. That's three years of losing money. That's fine, oil prices are down. But there has to be some way that the biggest oil company in the world can figure out how to make money in the hottest oil market in the world.
Priestley: Yeah, absolutely. Just to recap, Shell and Total, definitely for me, frontrunners thanks to, essentially, good cash management.
Muckerman: Sure, yeah.
Priestley: And a lot of growth projects being announced. Shell's CEO said he wants to challenge Exxon's financial dominance in the sector. I think he's done that, he's definitely doing that.
Muckerman: Yeah, if they keep this up, if things keep going the way they're going for both companies, sure.
Priestley: And then Exxon definitely disappointed with weaker outlook and cash problems essentially undermining its reputation. So, unless Exxon starts to get going pretty soon, we're probably going to see a continued slide. Maybe slowly, but I'm pretty sure that unless we get some good news soon, that's what's going to happen.
Muckerman: Yeah, agreed.
Priestley: Well, I think that's it from us today.
Muckerman: Yeah. That's some big oil. [laughs]
Priestley: [laughs] There you go, we just did a super quick recap. If you would like to get in touch, please feel free to email us at email@example.com or tweet us on Twitter @MFIndustryFocus. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thank you to Austin Morgan for producing this show. For Taylor, I'm Sarah Priestley. Thanks for listening and Fool on!
Sarah Priestley owns shares of General Electric. Taylor Muckerman owns shares of General Electric. The Motley Fool owns shares of and recommends Apple and Kinder Morgan. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.