The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Robert Cyran
NEW YORK, April 26 (Reuters Breakingviews) - Exxon Mobil XOM.N boss Darren Woods made a bold statement on Friday. Fossil fuels, he argues, are in decline. Among the reasons: the size of global energy demand, economic growth and population expansion. The $8.2 billion of quarterly earnings produced by the $465 billion oil major Woods runs, and rival Chevron’s CVX.N earnings of $5.5 billion, show that these firms are indeed embedded deeply in the world economy. But low gas prices tell a different story about the industry’s future.
While Exxon gushed profit in the first quarter, its earnings still shrank 28% from the same quarter a year ago; Chevron’s fell 16%. One problem was the abundance of gas, which depressed prices. Both companies are big in the Permian Basin of Texas and New Mexico, where oil pumping releases gas as a byproduct in a ratio that is rising over time. In addition, regulatory fines and curbs over “flaring," the process whereby gas is burned off, is increasing the amount of the stuff sent to market. This abundance is overwhelming pipelines, which carry the fuel to market. Local prices even turned earlier in April, as some producers paid to have gas taken off their hands.
A pipeline, scheduled to enter service shortly, should alleviate this problem. But it won’t stop the problem of continued planetary warming. The last two winters were relatively mild across much of the hemisphere, and since gas is used for heating, demand was lower than expected, pushing downwards on prices. It’s reasonable to assume that will continue. And the rise of innovations like electric-powered heat pumps to replace fossil fuels will be increasingly favored by lawmakers.
Even the promise of massive exports of liquefied gas may disappoint expectations. Morgan Stanley said recently it expects LNG production will cause oversupply in the gas market to reach multi-decade highs over the coming years. That suggests that two things could be true: Woods can be right that fossil fuels will still be in demand for a long time at a greater level than many expected, and that the profitability of fossil fuel producers can remain under pressure. With Exxon’s stock only trading at 13 times estimated earnings over the year, according to LSEG data, investors are siding with low prices.
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CONTEXT NEWS
Exxon Mobil said on April 26 it earned $8.2 billion in the first quarter, compared to $11.4 billion in the same period a year ago. Profit from oil and gas fell 12% compared to last year, largely because of lower gas prices. Refining profit fell 67%, because of lower margins and maintenance costs.
Separately, Chevron said first-quarter earnings were $5.5 billion, a 16% decrease from last year. The decrease was largely caused by lower gas prices and refining margins.
(Editing by John Foley and Sharon Lam)
((For previous columns by the author, Reuters customers can click on CYRAN/
robert.cyran@thomsonreuters.com; Reuters Messaging: robert.cyran.thomsonreuters.com@reuters.))