November 6, 2018

Breakingviews: Big oils profit bonanza raises flaring risk

by Breakingviews.

Big Oil is at risk of flaring its profit bonanza. Exxon Mobil and Chevron posted their highest quarterly cash flow since the days of $100 crude as higher prices helped them squeeze more out of each barrel pumped. Texas drills are humming and areas like Guyana are booming. But price rises may not last and investors are demanding greater returns.

The $340 billion Exxon pumped 57 percent more out of West Texas’ Permian Basin in the quarter compared with the same period last year, and continues to make new discoveries offshore in Guyana. Overall production fell, but each barrel pumped was much more profitable. Earnings were up 57 percent, well ahead of analysts’ expectations, and cash flow was at its highest level since the third quarter 2014. Its shares were up nearly 1 percent in late morning trading.

Chevron posted even better marks. Its production hit a record 2.96 million barrels a day and cash flow reached its highest level in about five years. Shares in the $215 billion oil giant popped more than 3 percent.

Still a shareholder doesn’t have to look back far to see a few warning signs. Oil prices have fallen about 15 percent in the past month. On Friday, the U.S. government said it agreed to grant waivers from American sanctions to allow eight countries to continue to buy oil from Iran, which should cause some temporary relief on oil prices ahead of the Nov. 6 U.S. midterm elections.

Meantime investors are still clamoring for greater returns. Return on capital employed has been creeping up but is nowhere near the levels of the last oil boom. In 2017, Exxon posted a 9 percent on this metric, far below the 25 percent of 2012. Chevron’s figure was a paltry 5 percent versus almost 19 percent six years ago.

Chevron has pledged to spend its cash more efficiently which has at least given ISI Evercore confidence that its returns should improve. Exxon continues to play catch up in the most attractive areas, like the Permian Basin. With surging profits giving both companies cash to burn, the risk is they will do just that.

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