IW US 500: Can Big Oil Prosper in the Energy Revolution?

IW US 500: Can Big Oil Prosper in the Energy Revolution?

The United States is awash in oil but abundance has proven a challenge for both major oil companies and manufacturing in general.

Half of the top 10 companies in the IW U.S. 500 make their money from oil and all of them reported lower sales in 2014 than in the previous year.

Take the leader of the IW 500, Exxon Mobil Corp. (IW500/1). The company has seen its overall sales slip for the past four years, from $471 billion in 2011 to $398 billion in 2014. The No. 2 company in the 2014 listing, Chevron Corp. (IW500/2), also saw its revenue slide, from $246 billion in 2011 to $204 billion in 2014.

Earning have also been hit. In the first quarter of 2015, Exxon Mobil earned $4.9 billion, down 46% from the same period in 2014.

"Exxon Mobil's balanced portfolio delivered solid financial results in the quarter," declared Chairman and CEO Rex Tillerson. "Regardless of current market conditions, we remain focused on business fundamentals and competitive advantages that create long-term shareholder value."

Those fundamentals, Tillerson told a Houston audience recently, include a world increasingly thirsty for energy. Exxon Mobil projects that "increases in population, along with growing trade and economic development, will increase global energy demand by about 30% between now and the year 2040."

As a result, Tillerson maintains, the world will need "wind, solar and other renewables. We will need increased use of nuclear power. And, importantly, we will need coal, oil and natural gas."

Energy analyst Tyler Crowe, commenting on The Motley Fool website, called Exxon Mobil a superior investment choice to Chevron, in part because it was doing a better job of investing across the petroleum value chain.

"Over the next several years, Exxon Mobil is looking to balance its portfolio of assets by investing more heavily in its refining and chemical manufacturing facilities. One of those projects is the Baytown ethylene plant that will cost upward of $6 billion and should be up and running in 2017. Add this to the massive chemical and lubricant plant expansions in Saudi Arabia and Singapore, and you have a company preparing to take advantage of every part of the oil and gas business to generate profits."

Still, Tillerson announced in March that the company would reduce spending on capital projects by 12% in 2015, to about $34 billion, and would maintain that level in 2016 and 2017.

While Exxon Mobil is a well-managed company with vast resources, no one thinks it has been easy for Exxon and its peers to maneuver through a rapidly changing energy environment. Daniel Yergin, vice chairman of IHS, noted: "Not long ago, the expectation was that $100 per barrel oil would be the new norm, China's strong economic growth would continue unabated, and OPEC and Saudi Arabia would continue to play the traditional role as swing producer in support of oil prices."

But as Yergin stated, "Events have proved otherwise…." Oil recently was selling at $52 per barrel. China's economy is maturing – and slowing, with GDP at 7.0% in the first quarter of this year and likely to be about the same in the second quarter. Industrial production in China grew at an 8.8% rate in May 2014 but fell to 6.1% this past May. And the surge in U.S. oil production has put it in the unfamiliar role of influencing oil prices as Saudi Arabia decides to protect its market share with unabated oil production.

Declining revenue has not been an issue at 1 Infinite Loop, the Cupertino, Calif., home of Apple Corp. (IW500/3). In fact, revenue has nearly tripled over the past five years. The House that Steve Jobs Built (and Tim Cook has made even bigger) saw sales increase by $11.8 billion or 6.9% in the past year. Net income of $39.5 billion in 2014 was equally impressive –the highest in the IW 500 and a figure that exceeded the next seven IW 500 companies combined.

Apple's sales were boosted by the successful launch of its iPhone 6 and 6 Plus models. In the first quarter of its fiscal 2015, which included the Christmas shopping season and ended Dec. 27, 2014, Apple reported it sold 74.5 million iPhones, helping to boost quarterly sales by 30% to a staggering $74.6 billion.

Two automotive giants continued occupying rungs of the top 10 -- Ford Motor Co. (IW500/7), which fell from No. 6 in the 2014 IW 500 to No. 7, and General Motors Co. (IW500/5), which remained in the fifth spot.

Ford introduced 24 models in 2014, but none was more important than its F-150 truck. The aluminum-body pickup is Ford's most popular model, but the tooling changes needed to produce the truck at Ford plants in Dearborn, Mich., and Kansas City, Mo., and reported shortages of frames, reduced initial sales for the truck. Ford has now reached full production volumes for the truck, CFO Bob Shanks reported, and the F-150 was the industry's sales leader in June.

General Motors also benefited in 2014 from cheaper gasoline and a renewed public interest in pickups and SUVs. GM sales rose both in North America and in China, where it outpaced the market, and the company posted a profit of $2.8 billion.

GM's results would have been even stronger if not for an extensive and expensive recall of models with defective ignition switches. At press time, the faulty switches have been linked to 124 deaths and 266 injuries. The recall shaved $2.8 billion from GM's 2014 earnings and the company said it expects compensation to victims to total as much as $600 million.

Those two companies bracketed another global giant -- General Electric Co. (IW500/6), which rose from No. 7 to No. 6. GE has made no secret of embracing its industrial roots. In April 2015, the company announced a major restructuring program designed to shed most of its financing arm, GE Capital, while strengthening its investments in the industrial sector. That process was well underway last year: In June 2014, GE announced a deal to purchase most of the energy sector assets of French firm Alstom for $16.9 billion.

General Electric plans to generate 90% of its profits from its industrial operations by 2018, CEO Jeff Immelt told analysts in April. Company executives say they expect GE to spend $3 billion to $5 billion a year on industrial acquisitions.

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