Oil companies face brutal 2020, warning of slow recovery in 2021

Exxon posted its fourth straight quarterly loss for the first time in modern history, driven by write-offs of more than $ 19 billion. Excluding the impairment, Exxon posted a quarterly profit of $ 110 million.

BP reported replacement earnings – a measure comparable to net income reported by US oil companies – of $ 825 million for the three months ended December 31, from a loss of $ 4 million in the same period last year.

Covid-19 has suppressed oil demand, soared prices and prompted the world’s largest energy companies to cut spending, cut jobs and write off the value of their assets. Amid the crisis, Exxon and Chevron discussed a merger of the US oil giants last year, according to people familiar with the matter, although talks did not progress.

“The past year has been the most challenging market conditions Exxon Mobil has ever experienced,” said Chief Executive Darren W. Woods.

Exxon remains under pressure from a few activist investors. One of them, Engine No. 1 LLC, last week appointed four directors to Exxon’s board of directors and called on her to make strategic changes to its business plan. On Tuesday, Exxon announced that it had elected a new independent director to its board of directors and that it is continuing discussions with other candidate directors.

Engine No. 1 said the changes were insufficient.

“A board that has done this dramatically and defied shareholder sentiment for so long has not earned the right to elect its own new members or pack itself in the face of the call for change,” said Engine No. 1 in a statement. “Exxon Mobil shareholders deserve a board that works proactively to create long-term value, not defensive in the face of declining returns and the threat of losing their seat.”

BP said Tuesday that the Covid-19 restrictions would continue to weaken demand in early 2021 and that the pandemic could have a lasting impact on the global economy, with the potential for weaker energy demand over an ongoing period.

Still, CEO Bernard Looney said the company expects demand to stabilize this year, although the speed and extent of the recovery are uncertain.

“It all depends on the introduction of vaccines, the effectiveness of the vaccine and compliance with OPEC,” said Mr. Looney. Unlike its US counterparts, Mr. Looney said that BP had not discussed mergers with any of its colleagues and that it was focused on executing its strategy to focus on low carbon energy.

BP’s shares were down 3.1% in London on Tuesday as the results came in below analysts’ expectations. Exxon was slightly higher on the premarket on Tuesday after the results.

Other oil companies are also feeling the pressure. Royal Dutch Shell RDS.A -0.85%

PLC reports Thursday and has telegraphed it will take a large write-off.

The pandemic has already triggered the largest revision of the value of oil and gas assets in at least a decade, as companies spend years souring in expensive projects ahead of low prices. Exxon’s write-off of more than $ 19 billion, primarily related to US shale gas assets, is one of the largest ever taken in the industry.

The Irving, Texas-based company cut nearly $ 12 billion in its 2020 capital expenditures and $ 8 billion in operating expenses in response to the pandemic, and said on Tuesday it will cut operating expenses by another $ 3 billion by 2023.

Exxon plans to spend as much as $ 25 billion a year on capital expenditures through 2025, but said on Tuesday that if Brent crude oil prices fall below $ 45 a barrel, the company could cut further. The company said it expects to cover its dividend, which will cost about $ 15 billion annually, from its 2021 cash flow, assuming Brent is $ 50 a barrel. It traded around $ 56 on Tuesday.

Activist investor Engine No.1 has argued that Exxon should focus more on clean energy investments while cutting costs to maintain the dividend. However, Exxon and rival Chevron have no plans to invest substantially in renewables, opting to double down on oil and gas. Both companies have argued that the world will need massive amounts of fossil fuels in the coming decades and that they can take advantage of the current underinvestment in oil production.

On Monday, Exxon said it would form a business unit that would focus solely on technologies to reduce carbon emissions, investing approximately $ 3 billion through 2025, primarily in carbon capture projects, which collect carbon emissions from industrial processes. , or straight from the air, and underground.

BP has suggested that fossil fuel demand may never fully recover and that the pandemic could accelerate the pace of the transition to a low-carbon economy.

Under Mr. Looney, BP has embarked on a plan to reduce its dependence on oil and gas while increasing investments in low-carbon energy such as wind and solar.

French energy giant Total SE TOT -0.37%

has also outlined plans to build up its renewable energy business, while Shell has indicated that it plans to follow a similar path later this month.

“An unprecedented collapse in demand has forced Big Oil’s hand to measure their dividends and capital frameworks; meanwhile, energy transition plans have accelerated, ”said Christyan Malek, JPMorgan analyst.

To bolster its finances, BP has sold assets to reduce debt. The company said it was now more than halfway to its $ 25 billion asset sales target by 2025, aided Monday by the sale of a 20% stake in a gas development in Oman. BP aims to reduce its debt to $ 35 billion by the first quarter of next year, from $ 39 billion by the end of 2020.

Rebecca Fitz, senior director at Boston Consulting Group, said she thinks both European and US strategies can work, but both need to deliver better returns and produce less carbon to be palatable to investors.

“When you have less capital, the choices about how to allocate that capital are grimmer,” said Ms. Fitz.

—Allison Prang contributed to this article.

Write to Christopher M. Matthews at [email protected] and Sarah McFarlane at [email protected]