Daily Brief: Oil Majors’ Savvy Cost-Cutting Has Helped Them Go Above And Beyond

Daily Brief: Oil Majors’ Savvy Cost-Cutting Has Helped Them Go Above And Beyond

over 2 years ago3 mins

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Chevron and ExxonMobil’s second-quarter results beat expectations on Friday, after a year of trimming the fat helped turn them into lean, mean oil-making machines.

What does this mean?

The second quarter of 2020 was a calamity for oil companies, with almost all of them turning in a loss after oil prices tanked last year. That forced them to take a long, hard look at themselves and, ultimately, cut unnecessary costs wherever they could.

Now, though, the slippery elixir’s price has come roaring back: it’s up over 150% in the last year. That’s allowed Exxon and Chevron to sell the oil they’ve been extracting at a higher price, which brought last quarter’s revenue in ahead of expectations. And since they were feeling remarkably cost-light after a year of cuts, their profits beat expectations too. Chevron even made investors’ days by saying it’d start buying back shares again.

Oil stock

Why should I care?

For markets: Oil up, oil stocks up.

Exxon and Chevron’s stocks both initially rose on Friday, which is saying something: analysts had long been expecting energy industry stocks to deliver the highest sales and earnings growth of any sector. That was already reflected in their share prices, with US energy stocks rising 35% this year – more than any other industry – versus the key US stock index’s 19%. And given that their stocks rose on Friday, it suggests investors – who might otherwise have cashed out and sent them down – see even more good news on the horizon.

The bigger picture: Nature is healing.

Data out on Friday showed the eurozone economy grew by a better-than-expected 14% in the second quarter compared to the same time last year, which bodes well for energy demand and the industry’s stocks. But rising oil prices also helped push eurozone inflation over the European Central Bank’s (ECB) target in July – and that could eventually become a problem for the industry if the ECB is forced to slow things down.

Euro area inflation

Procter & Gamble Reported Better-Than-Expected Results

PG image

Procter & Gamble (P&G) reported better-than-expected quarterly results late last week, as everyone finally let their hair down after a dry, dull, lifeless year.

What does this mean?

Not to rain on P&G’s parade, but investors saw the company’s better-than-expected quarterly sales and profit coming a mile off after strong updates from fellow consumer staples Coke and Pepsi earlier in the month. That’s probably why the company’s stock initially rose just 1% on Friday, even though analysts’ estimates hadn’t quite caught up yet. Its healthcare segment did especially well: customers have been stocking up on its premium personal care products, presumably to make sure they were all spruced up when they met real people in real places again.

PG stock
Source: Google Finance

Why should I care?

Zooming in: Price hikes are in the offing.

P&G did point out that its costs had been rising, and the company said it was planning to hike the prices of brands like Tide, Charmin, and Pampers. It’s hoping loyal customers will stick to the household names they know and love as prices rise, rather than switch to cheaper private label brands. It’s not alone either: rivals Kimberly-Clark and Unilever are essentially making the same bet.

Robust demand

For you personally: Have your cake and eat it too.

Investors have generally been expecting muted updates from economically resilient “defensive” companies like consumer staples, and blockbuster ones from economically sensitive “cyclical” firms. But you’d probably be better off investing across the market rather than trying to buy into sectors at exactly the right time, in case that rule of thumb ends up working against the companies. Just look at Caterpillar: the cyclical construction equipment-maker’s shares fell on Friday despite its stronger-than-expected earnings.

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