Oil giants warn of slow recovery

Exxon and BP post big losses after a ‘challenging’ year and signal the pandemic could continue to hurt them in 2021.

Oil producers have had a horror year. Picture: AFP

The big international oil companies are reporting one of their worst annual performances in decades and signalling that the pandemic could continue to challenge their businesses in 2021.

Exxon Mobil and BP disclosed annual losses of $US22 billion and $US18.1 billion respectively, following Chevron Corp, which on Friday reported a $US5.5 billion loss for 2020.

Exxon posted its fourth consecutive quarterly loss for the first time in modern history, driven by a more than $US19 billion writedown. Excluding the impairment, Exxon turned a quarterly profit of $US110 million.

BP reported a replacement cost profit -- a metric similar to the net income figure that US oil companies report -- of $US825 million for the three months ended December 31, from a loss of $US4 million in the year-earlier period.

COVID-19 has sapped demand for oil, hitting prices and prompting the world’s biggest energy companies to slash spending, cut jobs and write down the value of their assets. Amid the crisis, Exxon and Chevron discussed a merger of the US oil giants last year, according to people familiar with the matter, although the talks didn’t progress.

“The past year presented the most challenging market conditions Exxon Mobil has ever experienced,” said chief executive Darren W. Woods.

Exxon remains under pressure from a pair of activist investors. One of them, Engine No. 1 LLC, nominated four directors to Exxon’s board last week and called for it to make strategic changes to its business plan. On Tuesday, Exxon announced it had elected a new independent director to its board and is continuing discussions with other director candidates.

Engine No. 1 said the changes were insufficient.

“A board that has underperformed this dramatically and defied shareholder sentiment for this long has not earned the right to choose its own new members or pack itself in the face of calls for change,” Engine No. 1 said in a statement. “Exxon Mobil shareholders deserve a board that works proactively to create long-term value, not defensively in the face of deteriorating returns and the threat of losing their seats.”

Exxon says it has endured the “most challenging” conditions it’s ever faced. Picture: AFP

BP said COVID-19 restrictions would continue to sap demand early in 2021 and that the pandemic might have an enduring impact on the global economy, with the potential for weaker demand for energy for a sustained period.

Still, chief executive Bernard Looney said the company expects demand to stabilise this year, although the speed and degree of the recovery is uncertain.

“It’s all dependent on vaccine rollouts, vaccine efficacy and OPEC compliance,” Mr Looney said. Unlike its US counterparts, Mr Looney said that BP hadn’t spoken to any of its peers about mergers, and that it was focused on executing its strategy to pivot toward low-carbon energy.

BP’s shares traded 3.1 per cent lower in London as the results came in below analysts’ expectations. Exxon was slightly up premarket following its results.

Other oil companies are also feeling the strain. Royal Dutch Shell reports Thursday and has telegraphed it will take a large writedown.

The pandemic has already triggered the largest revision of the value of oil-and-gas assets in at least a decade, as companies sour on costly projects amid the prospect of low prices for years. Exxon’s more than $US19 billion writedown, primarily related to US shale gas assets, is among the largest ever taken in the industry.

The Irving, Texas-based company cut nearly $US12 billion from its 2020 capital expenditures and $US8 billion from operating expenses in response to the pandemic and said Tuesday that it will trim operational spending by another $US3 billion by 2023.

Exxon plans to spend as much $US25 billion a year on capital expenditures through 2025, but said Tuesday that if Brent crude oil prices fall below $US45 per barrel, the company could cut spending further. The company said it expects to cover its dividend, which costs it about $US15 billion annually, from its cash flow in 2021, assuming Brent is $US50 per barrel. It was trading around $US56 Tuesday.

Activist investor Engine No.1 has argued Exxon should focus more on investments in clean energy while cutting costs elsewhere to preserve its dividend. However, Exxon and rival Chevron haven’t set out plans to invest substantially in renewables, instead choosing to double down on oil and gas. Both companies have argued that the world will need vast amounts of fossil fuels for decades to come, and that they can capitalise on current underinvestment in oil production.

On Monday, Exxon said it would form a business unit focusing exclusively on technologies to reduce carbon emissions, investing about $US3 billion through 2025, primarily on carbon-capture projects, which gather carbon emissions from industrial processes, or directly from the air, and deposit them underground.

BP has suggested demand for fossil fuels might never fully recover and that the pandemic could accelerate the pace of transition to a lower-carbon economy.

BP CEO Bernard Looney. Picture: AFP

Under Mr Looney, BP has embarked on a plan to reduce its dependence on oil and gas, while increasing investments in low-carbon energy like wind and solar power.

French energy giant Total SE has also outlined plans to build up its renewables business, while Shell has signalled its intention to set out a similar path later this month.

“An unprecedented demand collapse has forced the hand of Big Oil to right-size their dividends and capital frames; meanwhile plans for energy transition have been accelerated,” said Christyan Malek, an analyst at JPMorgan.

To bolster its finances, BP has been selling assets to reduce debt. The company said it was now more than halfway to its target of $US25 billion of asset sales by 2025, helped Monday by the sale of a 20 per cent stake in a gas development in Oman. BP aims to lower its debt to $US35 billion by the first quarter of next year, down from $US39 billion at the end of 2020.

Rebecca Fitz, a senior director at Boston Consulting Group, said she thinks both the European and American strategies can work, but both must deliver better returns and produce less carbon to be palatable to investors.

“When you have less capital, choices around how you allocate that capital are more stark,” Ms. Fitz said.

Wall Street Journal