Oil companies support brutal 2020, warn of slow recovery in 2021

Exxon recorded its fourth consecutive quarterly loss for the first time in modern history, driven by a write-down of more than $ 19 billion. Excluding the loss, Exxon had a quarterly profit of $ 110 million.

BP reported replacement cost profit – a metric similar to the net result that US oil companies report – of $ 825 million for the three months ended December 31, from a loss of $ 4 million for the year previous.

Covid-19 undermined demand for oil, hitting prices and driving the world’s largest energy companies to cut spending, cut jobs and reduce the value of their assets. In the midst of the crisis, Exxon and Chevron discussed a merger of the North American oil giants last year, according to people familiar with the matter, although negotiations have not progressed.

“Last year presented the most challenging market conditions that Exxon Mobil has ever experienced,” said Chief Executive Darren W. Woods.

Exxon remains under pressure from two activist investors. One, Engine No. 1 LLC, appointed four directors to Exxon’s board last week and asked it to make strategic changes to its business plan. On Tuesday, Exxon announced that it has elected a new independent director to its board and is continuing discussions with other director candidates.

Engine # 1 said the changes were insufficient.

“A board that has underperformed dramatically and has challenged shareholder sentiment for so long has not gained the right to choose its own new members or bundle up in the face of requests for change,” Engine No. 1 said in a statement. “Exxon Mobil shareholders deserve advice that works proactively to create long-term value, not defensively in the face of deteriorating returns and the threat of losing their seats.”

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

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

“It all depends on the vaccine launch, the vaccine’s effectiveness and OPEC compliance,” said Looney. Unlike his American counterparts, Looney said that BP had not spoken to any of its peers about mergers and that it was focused on executing its pivot strategy towards low-carbon energy.

BP shares traded 3.1% lower in London on Tuesday, as the results were below analysts’ expectations. Exxon was slightly up before the market on Tuesday after its results.

Other oil companies are also feeling the pressure. Royal Dutch Shell RDS.A -1.02%

PLC reports Thursday and telegraphed that it will take a big reduction.

The pandemic has already triggered the biggest revision in the value of oil and gas assets in at least a decade, as companies waste time on expensive projects amid the prospect of low prices for years. Exxon’s depreciation of more than $ 19 billion, mainly related to United States shale gas assets, is among the largest ever in the industry.

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

Exxon plans to spend up to $ 25 billion a year on capital expenditures by 2025, but said on Tuesday that if Brent crude oil prices fall below $ 45 a barrel, the company could cut spending even further. The company said it expects to cover its dividends, which cost about $ 15 billion annually, from its cash flow in 2021, assuming Brent is $ 50 a barrel. It was trading around $ 56 on Tuesday.

Activist investor Engine No.1 argued that Exxon should focus more on clean energy investments while cutting costs elsewhere to preserve its dividends. However, Exxon and rival Chevron have not set out plans to invest substantially in renewable energy, instead opting to double oil and gas. Both companies argued that the world will need large quantities 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 with an exclusive focus on technologies to reduce carbon emissions, investing about $ 3 billion by 2025, mainly in carbon capture projects, which bring together carbon emissions industrial processes, or directly from the air, and deposit them underground.

BP suggested that demand for fossil fuels may never fully recover and that the pandemic could accelerate the pace of 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 energy.

Total French energy giant SE TOT -0.58%

it also outlined plans to build its renewable energy business, while Shell signaled its intention to set a similar path later this month.

“An unprecedented collapse in demand forced Big Oil’s hand to correctly size its dividends and capital structures; however, plans for the energy transition have been accelerated, ”said Christyan Malek, an analyst at JPMorgan.

To strengthen its finances, BP has been selling assets to reduce debt. The company said it is now more than half of its $ 25 billion asset sales target by 2025, helped on Monday by selling a 20% stake in a gas development in Oman. BP plans to reduce its debt to $ 35 billion in the first quarter of next year, from $ 39 billion in late 2020.

Rebecca Fitz, senior director at the Boston Consulting Group, said she believed that European and American strategies could work, but both should offer better returns and produce less carbon to be palatable to investors.

“When you have less capital, the options on how to allocate that capital are more rigid,” said Fitz.

—Allison Prang contributed to this article.

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