ExxonMobil, Chevron post profit declines amid lower oil prices, reflecting industry trends

In the third quarter of 2024, ExxonMobil and Chevron, two of the largest US oil companies, reported a sharp drop in profits, marking a stark contrast to the robust gains of the past two years. Lower commodity prices and weaker refining margins have hampered their ability to maintain the exceptional profitability they enjoyed in 2022 and 2023. This quarter's results are in line with similar declines for major energy companies Europeans, signaling a change in the entire global oil industry.

Quarterly earnings recap: Exxon and Chevron face declines

ExxonMobil, the largest Western oil company, reported net income of $8.6 billion in the third quarter, down 7 percent from the same period last year. Chevron, America's second largest oil company, reported a 30% drop in profit to $4.5 billion. Both companies posted revenue declines, with Exxon down 1 percent to $90 billion and Chevron down 6 percent to $51 billion.

The trend observed at Exxon and Chevron mirrors the situation of their European competitors. BP recently reported its lowest quarterly profit since the COVID-19 pandemic, and TotalEnergies earnings hit a three-year low. Shell was partially shielded by strong performance in its liquefied natural gas (LNG) segment, a growing sector of the global energy industry.

The impact of market changes on oil giants' profits

Industry profits hit record highs in 2022 as oil and gas prices skyrocketed due to Russia's invasion of Ukraine, which disrupted energy supplies and tightened the global oil market. However, a gradual decline in these prices, along with weaker refining margins, is hurting earnings.

Mike Wirth, Chevron's CEO, cited the steep decline in refining margins as a major factor contributing to lower profits. "Refining margins were extraordinarily strong in the third quarter of last year," Wirth told the Financial Times, "but they weren't strong at all in the third quarter of this year." Kathy Mikells, Exxon's CFO, also pointed to the impact of lower gas prices and refining margins, describing the change from last year's all-time highs as the biggest factor impacting their earnings.

External factors driving the decline: oversupply and slowing Chinese economy

The current decline is also influenced by weaker demand and sluggish economic growth in China, one of the world's biggest oil consumers. Against this background, global oil prices have fallen and US natural gas prices have reached historic lows due to a continued oversupply. Wirth speculated that if Chinese demand does not pick up, or if OPEC delays plans to bring supply back into the market, the industry could continue to experience "downward price pressures."

Increasing production and reducing costs drive performance

Despite the drop in profits, both Exxon and Chevron beat Wall Street expectations for the quarter. This was largely due to aggressive cost-cutting measures and increased production, particularly in the Permian Basin in Texas and New Mexico, the largest oil field in the US. The U.S. Energy Information Administration reported that U.S. crude oil production hit a record 13.4 million barrels per day in August, marking a milestone for the industry.

Exxon has also increased production at its offshore development in Guyana, a lucrative project that has recently sparked competition between the two US oil companies. Exxon has initiated arbitration proceedings against Chevron's $53 billion purchase of Hess, claiming it has a right of first refusal over Hess's stake in the Guyana project. The dispute is to be settled next year.

Focusing on returning value to shareholders in the context of lower prices

Both Exxon and Chevron continued to prioritize returning value to shareholders despite a price slump. Chevron returned a record $7.7 billion to shareholders through dividends and share buybacks this quarter. Exxon went further, returning $9.8 billion and announcing a dividend increase to maintain a 42-year streak of annual increases.

That strategy has raised some concerns in the industry, however, as oil companies try to maintain high levels of returns to shareholders in a period of lower prices. For example, BP indicated it would reassess its share buyback plans for 2025 in February.

A transition from growth to resilience

Recent declines in profits at ExxonMobil and Chevron underscore the oil industry's transition from a fast-growth phase to a more resilient one. As commodity prices stabilize and refining margins normalize, oil companies are increasingly focusing on efficient operations, cost reduction and diversification of revenue sources to navigate an uncertain future.

In an increasingly volatile market, Chevron and Exxon's strategies to mitigate the impact of lower prices while maintaining shareholder value will be closely monitored. With China's economic recovery still uncertain and OPEC policies in flux, the road ahead remains challenging. However, the US energy sector's ability to adapt could define its resilience in the face of these pressures, just as it has in the past during periods of major market change.