Energy Earnings Foreshadow Tougher Farm-in Funding for ASX Developers

A sharp fall in energy sector profits should have been expected but the 52% drop in ExxonMobil earnings and the 90% drop in Chevron’s second quarter outcome reported on Friday caused the prices of both stocks to fall by just under 5%. The large integrated refiners should have benefitted from expanded refining margins and increased petro-chemical profitability but the oil price fall has been too great to be offset. Attention is now turning to whether the majors are able to sustain their dividends and capital spending. Talk of mergers and acquisitions has started among investors trying to discern a growth path in a weak oil market. These changes contain an important implication for Australian oil exploration and development companies. Almost universally, they rely on the willingness of larger companies to enter farm-in agreements to achieve their development aims. The majors are likely to prove more circumspect in approving these investments. With a dramatic change in earnings now likely to precipitate a reappraisal of spending priorities, these effects are still to be felt and warrant added caution in assessing investment potential.