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OIL PRICE EFFECTS ON COMPANY PROFITS: WINNERS & LOSERS

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OIL PRICE EFFECTS ON COMPANY PROFITS: WINNERS & LOSERS

Nov 3 2014, 10:50 GMT

Stock.com

Total, Exxon, Shell and Chevron – Though all oil companies have been hit by the oil price slump, diversification on downstream business has rescued some.

With different plans come different profits – this is how 4 companies have dealt with the oil price slump.

The winners

Exxon and Chevron – the two largest oil companies in the world have both reported increases in profits above expectaions for the third quarter compared to the equivalent period in 2013:

Exxon: net income of $8.07bn, or $1.89 a share up 3 per cent. Revenue slipped 4.3% to $107.5 billion

Chevron: net income rose 12 per cent to $5.6bn or $2.95 a share. Revenue fell 6.5% to $54.7 billion

Granted, the oil price slump, bringing the price per barrel down to near $80, has dented production earnings in both cases, but profits from refinery and downstream business has offset the losses allowing the giants to buck the trend of most oil companies.

Both were confident in their investment in US shale oil and both used the lower priced oil from their production units to feed their refineries and it is here that higher margins and profits appear. Exxon’s chief executive, Rex Tillerson, noted that the integrated business model gave “competitive advantages….regardless of market fluctuations.” The proof is in the downstream business reports of 73 percent profit increase from refining to $1.02 billion and from chemicals the rise in earnings was 17 percent at $1.2 billion. Spending at Exxon was also much lower than cash from operations: $28.1 billion versus $37.7 billion, with dividend payments amounting to $8.64 billion.

Future increase in geographical production is in the business plans of both companies with Exxon citing Canada and Papua New Guinea, and Chevron promoting in Bangladesh, Australia and the Gulf of Mexico.

The losers

Total and Shell – In Europe the picture is different with Total from Paris and Shell from Amsterdam, both making losses and both blaming oil prices.

Total: net profit fell 2% in the third quarter to $3.56 billion as the average price of the key Brent crude-oil benchmark over the period declined by 8%.

Shell: 4.5% drop in its third-quarter net profit, to $4.46 billion.

Total’s attitude to the price slump is that OPEC will defend oil prices as it has done in the past and therefore is not looking to change any long-term strategy in business. Total are also confident that even at current prices, the company will have enough cash to pay dividends. However, unlike Exxon and Chevron, Total’s operating income comes primarily from oil and gas exploration and extraction (70%), and in a statement by CFO Patrick de la Chevardière, the forecast was set to deliver an increase in daily average output up 2.1million barrels to 2.3 million by 2015. With such emphasis on upstream business and no sight of Saudi losing its grip on price decreases, Total is sticking to limiting capital expenditure and operating costs, though sanctions on Russia have already delayed Total’s $27 billion LNG project in Yamal.

Shell’s strategy relies on oil prices staying within the range of $70 to $110 per barrel. The low earnings are blamed on oil price decreases and they have warned that expectations are not positive. Shell’s CFO Simon Henry explained, saying that with every $10 drop per barrel, $3 billion is beaten off Shell’s earnings. In answer, the company have slashed investment by nearly 50%, $9.4 billion to $4.8 billion with production down by 5% to 2.79 million barrels a day.

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