Oil majors post huge gains signaling possible recovery

Royal Dutch Shell, ExxonMobil and Chevron posted significant returns in their latest financial results indicating that a possible recovery of oil prices may be in sight though doubts for full recovery remain. Norway’s Statoil ASA, Italy’s Eni and France’s Total SA reported significant returns as well.

Europe’s largest oil firm Royal Dutch Shell reported profits for its second quarter that were three times larger than results in the same period last year. Exxon Mobil Corp. nearly doubled its net income compared with a year ago, to $3.35 billion, and Chevron Corp. saw profits jump to $1.45 billion in the second quarter.

Shell reported revenue of $72.13 billion, though analysts expected $67.78 billion, according to a report from Reuters. Net profit (on a current cost of supplies (CCS) basis) was $3.6 billion, up 245 percent from $1 billion in comparison to the second quarter of 2016.

Ben van Beurden, Shell Chief Executive said last week that the company had adjusted to a world in which prices could remain “lower forever” in a statement due to the potential for declining demand.

Beurden further said that “Cash generation has been resilient over four consecutive quarters, at an average oil price of just under $50 per barrel.”

As a sign of possible recovery, the world’s five biggest oil companies generated more than $30 billion in cash and managed to avoid sliding deeper into debt, an increasingly important barometer of their ability to survive the crisis according to Market Watch.

In addition to cutting costs by tens of billions, many have reoriented their businesses toward projects that can be completed quickly and produce profits within a few years rather than after more than a decade of upfront, billion-dollar spending.

Analysts say the biggest oil and gas companies are gradually recovering from the deep downturn of the past three years. In reaction to this development, OPEC and some non OPEC members including Russia decided to cut 1.8 million barrels per day from supply to prop up prices.

While the performance does not yet exceed pre-crash profits, the companies are beginning to show that they can thrive in a lower-price era.

“The companies are at different stages of learning how to deal with this low-price environment,” Brian Youngberg, an energy analyst at Edward Jones told Market Watch. “They will need to remain disciplined with their spending or investors will shun them.”

Oil majors in their report last week hauled in enough cash to cover their dividends and pay down debt. That represents a turnaround from the past two years, when most of them had huge debt profile on their books and had to drastically cut costs and improve efficiencies. Many could not even pay shareholders.

Oil companies have struggled to rein in costs as oil prices slumped due to glut in global oil market. This has led to cut in capital expenditure and deferring final investment decisions on key projects include Bonga South West project in Nigeria.

Shell’s CEO told CNBC there’s a lot of obsession with the oil price and that this is mainly driven by sentiment, not fundamentals. Nonetheless, he foresees an increase in oil prices next year, but did not want to be glued to the market changes. “We do not rely on that, we have to have a company that’s resilient to oil prices,” he said.

This is why Saudi Arabia had warned that the absence in investments in new projects would affect global oil demand after prices achieve relative stability. For OPEC, this may well be the conditions needed to help ramp up demand and oil prices.

ISAAC ANYAOGU