Opinion

The State of the Industry: Q1 2018


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The first quarter of 2018 has proven to be a continuation of an upswing that settled in over 2017, at least according to the financial results of the supermajors. Aggressive cost-cutting from the past paired with a consistent rise in crude prices over the first quarter has contributed to revenue and net profit gains across the board.

In London, BP announced its highest profits in years, with net profits jumping to US$2.59 billion, even as the company continues to be burdened by payments over the Deepwater Horizon catastrophe from 2010. But investors still reacted well to the numbers, with BP's share price reaching its highest levels since 2010 and it named a new chairman – Statoil's Helge Lund – who will be tasked to continue this streak of growth. Fellow European supermajor Total continued its winning streak, beating expectations in both revenue and net profits, as did Shell, where net profits jumped 42% to US$5.32 billion. In fact, Shell has beaten the industry's behemoth – ExxonMobil – in net profits for the past three quarters. ExxonMobil missed analyst expectations narrowly once again in the first quarter, although its US$4.7 billion net profit is nothing to be sniffed at. Yet, ExxonMobil shares remain on the downswing, with industry perception that new CEO Darren Woods have overseen a recovery that remains weaker than Shell's and even Chevron's.

The rise continues across the rest of the industry. Profits at Schlumberger are up 88%, promising a recovery in the service sector. Even Pemex, that beleaguered Mexican state oil firm, reported a 29% jump in net profits to US$6 billion. The impetus for the improvement has been rising crude prices, which averaged US$63/b over Q118 compared to US$53/b over Q117. In most cases, the magnitude of net profit increase has been matched by similar growth in revenue – which is a sign that the crude price rally is behind much of the profit gains. With crude prices trending even higher in Q218, industry financials are due for an even better quarter, though it is still too early to declare that the good times have come back for good.

Still, with numbers firmly in the black, analysts and investors are turning their eye towards more granular data to gauge performance. In this case, cash flow. Hoping that the increased profits will be passed on to shareholders through share buybacks, investors have rewarded firms that are embarking on buybacks – BP, Total – and punished those that have shied away. Shell's share prices were hammered after it announced it was not proceeding with a US$25 billion stock repurchase program yet, and ExxonMobil still has no intention of returning to generous buybacks as of yet. The latter two argue that more work needs to be done to fortify operational foundations, but it seems that investors are getting impatient and want to be rewarded for their patience since 2015.

From a long term investment perspective, Reuters reports that “ investors remain wary that oil demand may peak due to eventual mass adoption of battery-powered cars and more curbs on fossil fuel emissions by industry to meet environmental targets. Some are hedging their bets, buying shares in battery companies and chipmakers involved in making electric cars while lessening their exposure to pure oil plays. But the shift to cleaner energy doesn't necessarily mean investors are dumping the oil majors. Many are sticking with them but favouring companies which put more emphasis on renewables”. This seems to indicate that investors are still keen a growth story, that is sustainable from a long term perspective.


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