Exxon, Big Oil’s Negative Effect on S&P 500 Growth

New mega projects hold promise of future gains
February 2, 2015 Updated: February 3, 2015

NEW YORK—Oil major Exxon Mobil Corp. announced Monday its profits and its production are 4 percent down in the 4th quarter, but earnings still beat expectations slightly, and investors rewarded Exxon with an almost one percent increase in stock value.

With a $371 billion market capitalization, Exxon and other large U.S. oil companies have an outsized influence on the stock market. The sheer size of these companies gives them more influence over the S&P 500 index.

Poor performance of a number of U.S. oil companies mainly due to lower global oil prices have already dragged the index down to 2.2 percent. If oil stocks did as well on average as other companies in the S&P, growth would have been on track for a 5.1 percent increase this year.

“Rising tides lifted all ships, and now the tide is coming down and all ships are falling,” said Fadel Gheit, an analyst at Oppenheimer & Co.

Stem the Bleeding

Exxon posted a 21 percent decline in both revenue and profit for the fourth quarter because of lower oil prices. The company said it earned $6.57 billion in the quarter, the lowest since the first quarter of 2010, on revenue of $87.28 billion.

It was the 13th decline in the last 14 quarters. Four years ago, Exxon was producing nearly 1 million more barrels of oil and gas per day than it is now.

Chevron Corp., which is in the midst of its own boom of new mega-projects, posted similar results Friday. It managed to eke out a small gain in production, but posted a 30 percent decline in profit.

While the price of a crude oil barrel has plummeted to less than $50, from over $100 in August of last year, large oil firms have been able to keep up profits due to higher refining profits because they paid less for the oil they bought on the open market.

Exxon, Chevron, and Shell all posted higher earnings in the third quarter of last year even as oil prices slumped. That’s because refining profits rose more than production profits fell.

So far, it looks as if fourth quarter refining profits have jumped again. But this time, crude prices seem to have dropped too far for refining to make up the difference.

New Projects

One bright spot for the oil majors can be found in the simple fact that public corporations must deliver continuous growth for its investors. And the bigger companies must develop enormous projects to keep up.

Many of these projects, especially now that they must reach oil and gas in isolated locations, politically difficult countries, or extreme geological formations, take tens of billions of dollars and years of development.

Exxon has a large number of projects that were conceived of and developed at a time when oil prices were rising. Exxon and Chevron will both reduce spending on big capital projects this year, but that will only affect projects far in the future. The ones already under way will continue.

A fleet of enormous new oil and gas projects in places such as Abu Dhabi, Russia, Papua New Guinea, and the Gulf of Mexico are well into development. A record eight of these mega-projects came on-line last year.

Exxon has more new projects starting up this year, including an expansion of an already-large operation in the Canadian oil sands called Kearl, which will eventually produce 500,000 barrels of oil per day. By comparison, a typical well in the Bakken oil field in North Dakota will produce less than 1,000 barrels per day.

Rise and Fall

To the companies, and to most analysts, this apparent bad timing of new projects is not a major concern.

“Production growth is still a good thing, even in this lower price environment,” said Rich Eychner, an analyst at Raymond James.

These big projects produce oil and gas for decades, and the companies know that prices will rise and fall dramatically over the lives of the projects. It just so happens that a lull in prices is happening in the early years, they say.

And there’s an upside to low prices for the major oil companies. When oil prices drop and drilling activity slows, rig operators and other companies that work for big oil producers charge less. That could lower the cost of new exploration and even projects already under construction, making them more profitable over the long term.

“I am very comfortable that the economics will be just fine and they will be prolific contributors to the company for years to come,” Chevron CEO John Watson told investors Friday.

The Associated Press contributed to this report.