Profit for the two largest oil companies in the US tumbled during the first quarter, a three-month period in which the price of crude and gasoline rocketed higher.
It's a setback on paper only, however, the result of financial hedges that backfired after the US and Israel launched attacks on Iran in late February.
Exxon Mobil and Chevron reported quarterly results on Friday (local time), with adjusted profits for both companies topping Wall Street expectations. The shares of both companies, up sharply this week, ticked higher before the opening bell.
With energy prices depressed at the start of the year, Exxon Mobil and Chevron had arranged hedges to offset volatility, a standard practice in the industry. Companies and investors, through hedges, lock in a price in advance to protect themselves from futures swings. That can provide them with some predictability on costs.
In the aftermath of an attack by the US and Israel on Iran, however, the physical delivery of oil became impossible with the Strait of Hormuz essentially closed. Exxon and Chevron cannot book gains on those hedges until the crude is physically delivered.
The near closure of the Strait of Hormuz off the coast of Iran is a flashpoint in the war and the source of much of the economic pain being felt globally. About 20% of the world’s oil passes through the strait on a typical day, but the passage has been choked off since the war began in late February.
Exxon earned US$4.18 billion, or US$1 per share, for the period ended March 31. A year earlier, it earned US$7.7 billion, or US$1.76 per share. The company lost almost US$4 billion in the quarter on what it called “unfavourable estimated timing effects” of its hedges.
Removing such one-time impacts, Exxon earned US$1.16 per share, 9 cents better than Wall Street projections, according to a survey by Zacks Investment Research. Exxon does not adjust its reported results based on one-time events such as asset sales.
Revenue totaled US$85.14 billion, breezing past Wall Street's expectation of US$81.49 billion.
First-quarter net production was 4.6 million oil-equivalent barrels per day. That’s down from 5 million oil-equivalent barrels per day in the previous quarter.
“If you look at the unprecedented disruption in the world’s supply of oil and natural gas, the market hasn’t seen the full impact of that yet," CEO Darren Woods said during a conference call. "So there’s more to come if the Strait remains closed, why haven’t we seen those impacts manifest themselves fully in the market yet? Well, I think we all know there was a lot of water and a lot of oil in transit on the water, a lot of inventory on the water.”
Chevron reported a first-quarter profit of US$2.21 billion, or US$1.11 per share. It earned US$3.5 billion, or US$2 per share, a year earlier.
The company said that its quarter included a US$360 million net loss related to a legal reserve and that foreign currency effects lowered earnings by US$223 million.
Chevron's adjusted profit was US$1.41 per share, easily beating the 92 cents per share Wall Street was calling for. Like Exxon, Chevron does not adjust its reported results based on one-time events such as asset sales.
The company's revenue totaled US$48.61 billion, also better than expected.
Exxon and Chevron are among the big drillers reporting earnings this week. On Tuesday, BP said that its first-quarter profit more than doubled.
The oil companies' results come at a time when gasoline prices in the U.S. hit new multiyear highs, a point of increasing agitation for travellers, households and also businesses that are particularly sensitive to higher energy prices.
The average price of gasoline in the US hit US$4.39 on Friday, according to motor club AAA, up more than 8% this week.
Inflation in the US rose sharply in March, fueled by the largest jump in gas prices in six decades, according to data from the US Department of Labor. The surge in gas prices has squeezed the budgets of lower- and middle-income families, making it more difficult to pay for necessities.
But it’s disrupting businesses as well, particularly those sensitive to higher fuel costs. Airlines worldwide have begun cancelling flights as the war in the Middle East strains jet fuel supplies and pushes up ticket prices.
Oil prices eased on Friday, helping to steady the relatively few stock markets open worldwide on the May Day holiday.
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