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ExxonMobil Warns of Reserves Revisions; Chevron Records First 2016 Profit

ExxonMobil Corp. reported sharply lower profits for the third quarter as the prolonged decline in oil and natural gas prices exacted its toll on No. 1 U.S. producer. Chevron Corp., the No. 2 U.S. operator, also was hit by the slump in pricing, but it managed to score its first quarterly profit of the year following massive writedowns.

The Irving, TX-based supermajor reported its eighth-straight quarterly decline in profits, with 3Q2016 net income of $2.66 million (63 cents/share) from $4.24 billion ($1.01) a year ago. Revenue slipped 13% to $58.7 billion. Global upstream profits fell 16% to $620 million. U.S. upstream losses widened to $477 million from a year-ago loss of $442 million. While chemical sales were flat year/year, the usually reliable downstream division saw its profits decline to $1.2 billion, which is $804 million less than in 3Q2015.

The "operating environment remains challenging," CEO Rex Tillerson said. He said the company continued to "focus on capturing efficiencies" and advancing some strategic investments.

In fact, capital expenditures are declining sharply as efficiencies kick in and oilfield concessions are achieved. Capital and exploration spending fell 45% from a year ago to $4.19 billion, while costs have fallen year-to-date by 39%. Year-to-date capital expenses and operating costs together have fallen by $12 billion from the first nine months of 2015.

Total liquids production declined by 120,000 b/d from a year ago to 2.2 million b/d, while natural gas production rose to 9.6 Bcf/d, up 77 MMcf/d, as project start-ups more than offset field decline and divestment impacts. Sequentially, volumes fell by 146,000 boe/d, or almost 4%, with liquids off 119,000 b/d and gas output falling 161 MMcf/d "as lower seasonable gas demand and reduced entitlements were partly offset by project growth and increased volumes from U.S. work programs," investor relations chief Jeff Woodbury said during a conference call Friday to discuss results. However, total global production of 3.81 million boe/d in the quarter was the lowest level since 2009.

ExxonMobil also warned that it may take its largest reserves revision since it was formed in 1999 on the continuing price slump. If prices were to remain at current levels through the end of this year, about 3.6 billion bbl of reserves in Canadian oilsands and 1 billion boe -- mostly U.S. natural gas reserves -- could be de-booked under U.S. Securities and Exchange Commission (SEC) rules, Woodbury said. A writedown of that size would equate to about 19% of ExxonMobil's total reserves and be the largest since the corporation was formed (see Daily GPI, Dec. 16, 1999).

"We're seeing almost a 25% reduction in prices on an SEC basis year-to-date," Woodbury said. "Now of course, we need to wait until we get the last two data points for that calculation, but given what we were seeing to this point, we felt it was appropriate to signal the potential impact from the SEC pricing basis on proved reserves."

For 2015, ExxonMobil replaced about 67% of its oil and gas reserves, the "net result of natural gas reserves being reduced by 834 million oil-equivalent bbl, primarily in the U.S., reflecting the change in natural gas prices offset by liquid additions of 1.9 billion bbl," he told analysts.

“Given that year-to-date crude prices are down further from 2015 by almost 25% on the SEC pricing basis, we anticipate that certain quantities of currently booked reserves, such as those associated with our Canadian oilsands, will not qualified as crude reserves at year-end 2016.

"In addition, if these price levels persist, reserves associated with end-of-field life production or certain other liquids and natural gas operations in North America also may not qualify...Amounts required to be de-booked on an SEC basis are subject to being re-booked in the future when price levels recover or when future operating or cost efficiencies are implemented. We do not expect the de-booking of reported reserves under the SEC definitions to affect operation of these assets or to alter our outlook for future production volumes."

Because of "continued weakness in the upstream industry environment, and in connection with our annual planning and budgeting process, we will again perform an assessment of our major long-life assets similar to the exercise undertaken in 2015. We will complete this assessment in the fourth quarter and report any impacts in our year-end financial statements."

New York Attorney General Eric Schneiderman is investigating why ExxonMobil had not written down the value of any of its reserves since the oil slump began in 2014 (see Daily GPI, Oct. 27; Sept. 21). ExxonMobil has confirmed that the SEC is investigating. The SEC requires producers to use the 12-month average trailing price for oil and natural gas to book the value of their reserves and mandates that proved undeveloped reserves, or PUDs, be developed within five years or be deleted from the reserves numbers.

San Ramon, CA-based Chevron reported earnings for the first time this year in 3Q2016 of $1.3 billion (68 cents/share), versus profits of $2 billion ($1.09) a year ago. Revenue fell to $29 billion from $33 billion. Chevron had recorded almost $4 billion in asset impairments as slack energy prices gutted the value of its reserves.

While the U.S. upstream arm suffered a $212 million loss in the quarter, it was better than a year ago when the division lost $603 million. Average sales prices for U.S. crude oil and natural gas liquids were $37/bbl in 3Q2016 from $42 a year ago. The average natural gas sales price was $1.89/Mcf, from $1.96 in in 3Q2015.

In the upstream unit, worldwide output was 2.51 million boe/d net, slightly lower than a year ago when the operator pumped 2.54 million boe/d. U.S. production totaled 698,000 boe/d net, down 32,000 boe/d year/year. The U.S. net liquids component increased 3% to 519,000 boe/d, while net natural gas production decreased 20% to 1.08 Bcf/d, primarily as a result of asset sales.

Domestic production increases from shale and tight properties in the Permian Basin in Texas and New Mexico, base business in the Gulf of Mexico and San Joaquin Valley, and the Jack/St. Malo deepwater were more than offset by the effect of asset sales, normal field declines and maintenance-related downtime.

"Third quarter results, though down from a year ago, reflect an improvement from the first two quarters of this year," said CEO John Watson. “Our operational performance in the third quarter was strong." There were "steady" liquefied natural gas (LNG) production and cargo shipments from Gorgon Train 1 in Australia, "and we recently started LNG production from Gorgon Train 2. In light of these milestones, we expect December production between 2.65-2.70 million boe/d."

Progress also was made toward lowering the cash breakeven in the upstream business and getting cash balanced, Watson said.

Mirroring ExxonMobil's strong efficiencies, Watson said Chevron had reduced by more than $10 billion capital spending and operating expenses in the first nine months of 2015 "as a result of a series of deliberate actions we have taken."

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