Oil and Gas Company Profits

Brian Hicks

Written By Brian Hicks

Posted April 29, 2013

Major oil and gas companies Chevron Corp. (NYSE:CVX) and CNOOC Limited (NYSE:CEO) have both beat expectations, but there are some illuminating differences. Let’s take a closer look.

Chevron, already the third-largest energy company in the world based on market value, posted Q1 profits well in excess of expectations thanks to improved natural gas production output and rising natural gas prices.

Bloomberg reports that net income for the company was down 4.5 percent to $6.18 billion ($3.18/share). Earnings from oil and gas wells internationally were up 3.1 percent to hit $4.78 billion.

offshore drilling rig 7-30Within the U.S., gas output increased from new wells bored in the Marcellus Shale, where Chevron operates joint ventures with Reliance Industries Ltd. The Indian company shoulders the burden of drilling costs for the venture. However, total sales for Chevron were down 6.4 percent to $56.8 billion, due largely to declining oil prices. So far this year, Chevron is up 12.4%.

What’s interesting here is that in spite of the fact that 2012 oil and gas output dropped to its lowest in four years, the company plans to spend $36.7 billion this year alone on exploration, refinery operations, and gas export terminals.

The increased investment comes as a response to this low output, and in fact the company has stated its intentions to expand onshore holdings and improve drilling techniques to raise efficiencies.

Over Q1, Chevron’s global production was up 0.5 percent, or 2.65 million barrels of oil per day. And over the same period, U.S. gas output was up 7.3 percent even as prices went up 39 percent to reach an average of $3.48 per million British thermal units.

Chevron does expect oil and gas production to increase further this year—by 1.5 percent, to hit the daily average of 2.65 million barrels a day, Bloomberg reports. That assumes an average crude price over 2013 of $112/barrel.

The Q1 results helped Chevron outperform Exxon Mobil (NYSE:XOM), with share advances of 9.9 percent versus Exxon’s 4.1 percent.

Falling Oil, Rising Gas

Clearly, the biggest reasons Chevron’s profit was dragged down are falling oil prices, higher domestic operating costs, and extensive refinery downtime. Chevron remains quite profitable and in good health, and the company is currently targeting 25 percent growth in output by 2017—a goal that its long-delayed Angola natural gas plant will surely help realize.

That facility is expected to come online at full capacity by the end of this year, adding 20,000 bpd for the year and some 60,000 bpd after that. And Brazil recently approved Chevron to resume operations at four wells in the Frade field, which will also boost output levels.

However, as oil prices worldwide continue to fall, it’s clear that natural gas is what may pull energy companies upward. And indeed, Chevron’s focus on natural gas has proven a wise bet.

What with companies pushing for export terminals, and the U.S. administration bound to come out with a decision on that in the near future, it’s a good guess to say that natural gas will remain a focal point for U.S. energy companies.

CNOOC Growth

China’s CNOOC, meanwhile, showcased a 13 percent growth in Q1 sales due largely to higher output working against the global drop in oil prices. Per Bloomberg, sales were up to $8.97 billion, up 17 percent from the same period a year earlier.

The company expects production increases of up to 1.6 percent, but that’s still lower than 2012’s 3.2 percent. However, the recent purchase of Canada’s Nexen Inc. (TSX:NXY) is sure to add more to production output.

The pattern’s clear, though. Despite falling oil prices that affected CNOOC too, boosted production of oil and natural gas helped beat back that effect.

And CNOOC has invested widely in oil and natural gas; since 2011, CNOOC and its parent company China National Offshore Oil Corp. have jointly poured $24.8 billion on overseas assets in Africa, Canada, and Australia.

Natural gas is proving to be the thing on which companies around the world profiting. Prices for natural gas within the U.S. continue to rise (and they are comparatively much higher in Asia and Europe), making it more profitable for companies extracting the gas.

With the proliferation of export terminals domestically, we should expect some turbulence in the price levels of natural gas until the global market stabilizes itself. For now, though, natural gas is the more profitable venture.


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