Oil Companies Report Strong Earnings, but Can They Keep Up the Good Performance?

• Major oil companies posted strong first quarter earnings despite lower oil prices
• It remains unclear whether these earnings can be sustained into the second quarter as oil prices continue to weaken
• A downturn in oil prices could provide opportunities for companies with a lot of cash to make acquisitions and position themselves well for the next upswing in demand

Major oil companies announced their first quarter earnings last week and this week and the results are largely positive despite lower oil prices.

ExxonMobil (NYSE:XOM) posted record first quarter profits, Chevron (NYSE:CVX) beat market expectations, and even European oil companies, which generally don’t make as much money as their American counterparts, showed strong earnings. Oil refineries also posted strong earnings. The real question is whether these strong earnings can be sustained into the second quarter as oil prices are weakening.

ExxonMobil earned $11.4 billion in profit and ended the quarter with $33 billion in cash. This is the largest amount of free cash the company has had since 2008. The source of this strong performance this quarter was ExxonMobil’s downstream sector.

WTI prices averaged only $76.08 per barrel in the first quarter, which is a significant drop from prices in 2022. ExxonMobil’s global refining business brought the company $4.2 billion in profit—a major turnaround from the same quarter last year when its refining business lost money after it faced high maintenance costs.

Chevron made $6.6 billion, which, according to the Wall Street Journal, is more than double Chevron’s quarterly average for the last ten years.

Like ExxonMobil, Chevron’s refining sector helped boost the company’s earnings even though upstream earnings were down. Chevron benefitted from higher margins on refined products and higher jet fuel demand.

U.S. oil-refining companies, like Marathon Petroleum (NYSE:MPC) and Valero Energy (NYSE:VLO), also posted very strong profits. While demand for diesel fuel has dropped off recently, increased demand for jet fuel and strong exports more than made up for the difference.

BP's (LON:BP) earnings were also stronger than expected—$5 billion this quarter compared to $4.8 billion in the last quarter of 2022. However, BP made most of its money on trading natural gas and oil. This is consistent with other quarters when BP’s oil trading division has shown strong profits for the company.

The London-based company should be able to continue making money trading oil and gas when prices are lower, but if global demand falters and fewer cargoes are being shipped and traded, then BP’s trading arm will likely become less profitable.

If oil prices continue to drop, it is unlikely that these companies will continue to post such strong earnings. Refining margins in the U.S. are already $10 lower than they were a year prior.

Demand for distillates, often seen as a measure of U.S. industrial activity, was below the 5-year average for most of the first quarter. If this continues to fall, then robust jet fuel demand won’t be able to compensate.

Many analysts were looking to China to be the source of oil demand this year, but Chinese industrial demand has not returned to full strength.

Chinese consumer demand for fuel has been strong, but manufacturing remains weaker than expected. If this doesn’t rebound, then we are looking at a difficult period for oil company earnings and share prices.

However, a downturn in oil prices will allow companies with a lot of cash (like ExxonMobil and Chevron) the opportunity to purchase other companies or acquire acreage and leases for bargain prices. This will position them well for the next upswing in oil demand.

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Disclosure: The author does not own any of the securities mentioned.