The collapse of a major oil company within the next few years is now a strong possibility because of the plunging price of oil. That means oil companies may no longer be the safe value investment that many people assumed they were.
The price for crude oil in the United States fell to $40.20 (€36.95) a barrel on December 4, 2015, CNBC reported. Internationally, the price for Brent Crude fell by 60¢ (€.55) in just one day between December 3 and 4, dropping from $43.03 (€39.54) to $42.43 (€38.91) a barrel.
To make matters worse, OPEC actually voted to raise its production ceiling and pump more oil on the same day. That means even more oil in the market and even lower prices.
Oil Companies on the Verge of Negative Income
Not surprisingly, the plunging oil prices have wreaked havoc on the revenues and incomes of the big oil companies. The financial data and the math indicate that some of the major oil companies could soon be facing serious losses and even collapse if oil prices stay low.
Financial numbers that demonstrate Big Oil’s perilous situation include:
- ExxonMobil (NYSE: XOM) saw its revenue fall from $435.52 billion (€400.26 billion) to $296.35 billion (€272.36 billion) between September 2014 and September 2015, a decline of $139.17 billion (€127.9 billion) in just one year.
- Exxon also saw its net income fall by $14.36 billion (€13.2 billion) in the same period. ExxonMobil reported a net income of $34.3 billion (€31.52 billion) in September 2014 that dropped to $19.94 billion (€18.33 billion) just a year later.
- Chevron (NYSE: CVX) revenue declined by $66.72 billion (€61.32 billion) between September 2014 and September 2015. Chevron reported a TTM revenue of $222.04 billion (€204.06 billion) in September 2014 that fell to $155.32 billion (€142.74 billion) just a year later.
- Chevron lost more than half of its income between September 2014 and September 2015. Chevron reported a net income of $20.70 billion (€19.02 billion) in September 2014 that fell to $8.656 billion (€7.96 billion) in September 2015. If Chevron experiences such losses again this year, it could be facing negative income next year.
- British Petroleum (NYSE: BP) saw its revenue fall by $130.99 billion (€120.38 billion) between September 2014 and September 2015. BP reported a TTM revenue of $378.68 billion (€348.02 billion) in third quarter 2014 that fell to $247.69 billion (€227.64 billion) just a year later.
- British Petroleum is already losing money. It reported a negative net income of -$7.58 billion (-€6.97 billion) on September 30, 2015. A year earlier it reported a net income of $9.22 billion (€8.47 billion); that translates into a loss of around $16.809 billion (€15.45 billion) in a year.
- Royal Dutch Shell (OTC: RYDBF) watched its revenue fall by $142.51 billion (€130.97 billion) between September 2014 and September 2015. Shell reported revenues of $448.66 billion (€412.33 billion) in third quarter 2014 that fell to $306.15 billion (€281.36 billion) a year later.
- Almost all of Shell’s net income evaporated in just one year. Shell reported a net income of $16.06 billion (€14.76 billion) in September 2014 that fell to $1.595 billion (€1.47 billion) in September 2015, a loss of $14.465 billion (€13.29 billion) in a year. If such losses keep up, Shell could be reporting negative income for Fourth Quarter 2015.
The revenue figures show us that some of the benefits investors have enjoyed from Big Oil, such as ExxonMobil’s 3.69% dividend yield and 11.46% return on equity, could soon be nothing but fond memories. One has to wonder if the oil company’s business model is even sustainable in today’s world.
Collapse of a Major Oil Company Inevitable
The sudden revenue collapse at all the oil companies indicates that some major changes are coming to this sector and soon. One strong possibility could be consolidation as oil companies merge just to survive.
ExxonMobil could soon be in position to purchase Chevron, BP or Shell if it wanted to in the near future. Such an acquisition might be the only way that ExxonMobil could avoid negative income within two years.
The collapse of at least one major oil company looks inevitable because of the revenue drops. Both Shell and BP look as if they are on the verge of collapse or at least major losses.
The most likely possibility will be that the collapse in revenue will lead to a collapse in oil companies’ share prices. Warren Buffett’s decision to sell all of his ExxonMobil stock last year looks like a wise one in light of these figures.
Big Oil is no longer a value investment, because of the volatility of oil prices. Investors looking for security would be well advised to follow Buffett’s lead and sell their oil stocks.