Why ExxonMobil and Chevron Q1 Earnings Are Expected To Fall Despite Rising Oil Prices (2024)

Source: Visible Alpha, Company Filings

The significant year-over-year drop in earnings per share (EPS) expected for the nation's two largest oil producers seemingly defies the 2024 first quarter's surge in global oil prices.

West Texas Intermediate (WTI) rose roughly 16% in the first three months of this year amid heightened geopolitical tensions, in sharp contrast to a near 6% decline over the same period in 2023.

"Strong WTI pricing comes at an unwelcome time for US gas producers who are already dealing with significant oversupply in the US gas market," Factset's energy analyst Connor McLeanwrote in a commentary, adding that higher oil prices may inadvertently worsen the gas oversupply as it they will "drive increased associated gas production in oil-directed plays."

Lower Natural Gas Prices

At the same time, mild global winters the past two years curbed heating demand, increasing U.S. natural gas inventories 23% compared with a year ago and about 38% compared with the five-year average, according March-end weekly data from the Energy Information Administration. Not surprisingly, average U.S. wholesale natural gas prices plunged 20% in the first quarter compared with a year ago.

Exxon and Chevron both produce natural gas via dedicated gas fields. In addition, it's a byproduct of oil production. Depending on timing, prices, and demand, they both derive a quarter to a half of their production revenue from natural gas.

A drop in natural gas prices likely crimped revenue and earnings from the upstream production operations that account for the majority of business for both companies.

For example, Chevron's natural gas production likely rose 8% year-on-year during the quarter, but the firm's upstream earnings likely stayed flat. Exxon's upstream income, meanwhile, likely contracted 7% for the quarter ending in March.

Downstream Difficulties

Meanwhile, rising oil prices meant that the downstream refining operations of both companies had to pay increasingly more money for raw crude to turn into gasoline. But at the same time, average U.S. gasoline prices at the pump fell 4% compared with a year ago to $3.24 per gallon.

That combination may have reduced refining profit margins. Moreover, refinery output and sales of refined products fell. Exxon's daily refinery output and petroleum sales volume likely fell 3.7% and 1%, respectively, according to Visible Alpha estimates.

Overall, however, the latest quarter's earnings decline appears short-lived for both companies. Analysts currently forecast second-quarter earnings will increase at both companies on a year-to-year basis.