Oil and Gas Shows Predictable Decline
By: Keefe Borden
Tags: Energy, Global Economy, Investing, Business, Markets

Oil and Gas Shows Predictable Decline

The struggle to contain COVID-19 is apparent in Q2 filings

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The response to the coronavirus has caused a worldwide decline in demand for petroleum products. That fall in demand has started to reverse in recent weeks, but its results are well documented in the second-quarter earnings reports released by oil and gas companies.

The results from the second quarter are not pretty. In general, oil and gas companies are reporting falling profits, revenue and cash flows, a decline in production, idle refineries and an increase in both debt and write-offs.

For many of these companies, there is a great deal of uncertainty about the long-term prospects of the sector as a whole. The decline in capital expenditures boosts free cash flows, but comes at the expense of future growth. Simultaneously, the decline in prices has led to the sale of specific assets or entire companies.

Royal Dutch Shell Plc lost $18.1 billion during the second quarter, which included a post-tax impairment of $16.8 billion, down from earnings of nearly $3 billion one year ago.

The impairment was caused by lower oil and gas prices expected in the medium- and long-term, and a decline in refining margins, which in turn was the result of a the decrease in demand for petroleum products, the company said.

Shell’s revenue for the second quarter was $32.5 billion, down from $90.5 billion a year ago. The disappointing results are the consequence of lower prices for oil, LNG and natural gas, a decline in refining margins and a reduction in overall sales volumes.

The company’s capital expenditures for the period were $3.6 billion, down from $5.3 billion a year earlier.

To cope with the ongoing decline, Shell announced in April that it would cut its quarterly dividend from 47 cents per share to 16 cents per share and suspend the next tranche of its share buyback program.

“The pace and scale of the societal impact of COVID-19 and the resulting deterioration in the macroeconomic and commodity price outlook is unprecedented. The duration of these impacts remains unclear with the expectation that the weaker conditions will likely extend beyond 2020,” the company said.

Notably during Q2, Shell agreed to sell its Appalachia shale gas position for $541 million, a transaction expected to close in Q3. Looking forward, Shell said its future is uncertain. The negative impact in demand for oil gas and related products is expected to continue through Q3.

ExxonMobil reports Q2 loss of $1.08 billion

ExxonMobil reported it lost $1.1 billion in Q2, down from net income of $3.1 billion earnings a year ago. The second quarter loss exceeded the loss of the first quarter ($610 million) and marks the first time in more than a decade the company has had back-to-back quarterly losses.

The company’s capital and exploration expenditures fell to $5.3 billion, down from $8.1 billion a year ago.

Global production was 3.6 million barrels of oil equivalent per day (boe/d), down 7% from a year ago.

“The global pandemic and oversupply conditions significantly impacted our second quarter financial results with lower prices, margins, and sales volumes,” said Darren Woods, the company’s chairman and CEO.

“We responded decisively by reducing near-term spending and continuing work to improve efficiency by leveraging recent reorganizations,” he added.

ExxonMobil will not cut its dividend, and does not plan to take on additional debt in the near future. Worldwide refinery throughput was 3.5 million barrels per day (b/d), down from 3.9 million b/d a year ago.

The reduction in throughput stems in part from the worldwide decline in petroleum product sales, which fell to 4.4 million b/d, from 5.4 million b/d a year earlier.

Total shows $8.4 billion loss in Q2

Total, another major energy company, reported a roughly $8.4 billion loss for Q2, compared to net income of nearly $2.8 billion a year ago. Total hydrocarbon production was 2.8 million boe/d, down 4% from a year ago.

Refinery throughput volumes fell 22% in Q2 from a year earlier, primarily caused by a prolonged shutdown at its 120,000 b/d refinery in Feyzin, France and a decision not to restart its 102,000 bbl/d refinery Grandpuits, France after a major turnaround.

“During the second quarter, the Group faced exceptional circumstances: the COVID-19 health crisis with its impact on the global economy and the oil market crisis with Brent falling sharply to $30/b on average, gas prices dropping to historic lows and refining margins collapsing due to weak demand,” said Patrick Pouyanne, the company’s CEO.

Total’s net loss for Q2 included $8.2 billion in impairments, most of which correspond to its Canadian oil sands assets. Looking forward, the company described the outlook as uncertain. It expects 2020 production to be between 2.9 million and 2.95 million boe/d.

Chevron loss surpasses $8 billion

Chevron Corp. reported a Q2 loss of $8.3 billion , compared with earnings of $4.3 billion one year earlier. Included in that loss was a $1.8 billion in impairments and other net charges. The company also fully impaired its $2.6 billion investment in Venezuela because of the ongoing uncertainty in that country.

“The economic impact of the response to COVID-19 significantly reduced demand for our products and lowered commodity prices,” CEO and chairman Michael Wirth said in a prepared statement.”

“Given the uncertainties associated with economic recovery, and ample oil and gas supplies, we made a downward revision to our commodity price outlook which resulted in asset impairments and other charges.”

Chevron has seen some recovery in demand, but they are still not back to the pre-pandemic levels seen at the start of the year. As a result, the company expected demand to be restricted into Q3. Cash flow from operations in the first six months of 2020 was $4.8 billion, less than half the $13.8 billion one year earlier.

Meanwhile, capital expenditures fell to to $7.7 billion, compared with $10 billion in the same period in 2019. The company’s downstream operations have fallen moderately. Refinery crude runs were 589,000 bbl/d, down 2% from a year ago. Refined product sales were 1.1 million b/d, down 13% from a year ago.

Chevron recently announced plans to buy Noble Energy in an all-stock transaction valued at $5 billion. When debt is added to the deal, the transaction is worth $13 billion.

From Chevron’s perspective, the acquisition will give it access to low-cost, proved reserves and offshore resources in the eastern Mediterranean and the Permian basin.

Because many of the acquired properties are adjacent to Chevron’s existing assets in the Permian, the company expects to generate synergies of $300 million before tax.

The transaction will add about 18% to Chevron’s year-end 2019 proved oil and gas reserves at an average acquisition cost of less than $5/boe. The transaction price represents a premium of nearly 12% of the 10-day average price of both companies on July 17. Following the transaction, Noble Energy shareholders will hold about 3% of the combined company.

BP reports $16.8 billion Q2 loss, trims dividend

BP was the last of the large public companies to file its results, which were similar to the others. The company reported a Q2 loss of $16.8 billion, compared with a profit of $1.8 billion a year earlier.

BP reported capital expenditures in Q2 fell to $3.1 billion, down from nearly $5.7 billion a year earlier. The Q2 results include a $9.2 billion impairment the company made after it lowered its long-term price assumptions for oil and gas.

“BP’s redesign of its organization to become leaner, faster moving and lower cost, including the announced reduction of around 10,000 jobs, is expected to make a significant contribution to the planned $2.5 billion reduction in annual cash costs by the end of 2021, relative to 2019,” the company stated.

BP issued $11.9 billion in hybrid bonds in an effort to diversify its capital structure and strengthen its balance sheet. The bonds went on the balance sheet as equity in part because the terms of the instruments allow the company to defer coupon repayments indefinitely.

Meanwhile, it trimmed its dividend to 5.25 cents per share, from 10.5 cents per share the previous quarter. The weaker dividend is part of an effort to conserve cash flows as the company expects the COVID-19 pandemic to have lasting effects on the demand for fuel. BP said it expects the world’s transition to lower carbon energy sources will accelerate in the aftermath of the pandemic.

Worldwide jet fuel consumption plunges

The U.S. Energy Information Administration reported the impairments are an extension of the first quarter of the year. A study conducted by the agency showed 40 U.S. oil producers collectively wrote down $48 billion worth of assets in the first quarter of the year, attributing them to low oil prices, declines in revenue and the value of proved reserves.

These impairments are a non-cash adjustment to the company’s balance sheets, through which it recognizes the value of an asset, in this case, oil property, has declined below the cost of developing it.

While demand for petroleum fuels has fallen abruptly as the world confronts COVID-19, there has been some rebound in demand over the last few weeks. The one exception is jet fuel. In short, people aren’t flying as much as they used to.

In the U.S., the world’s largest consumer of jet fuel, average consumption was 41% of what it had been a year ago, the U.S. Energy Information Administration reports.

The agency extrapolated that data to estimate the change in worldwide consumption from a year ago. Based on estimates of the number of commercial passenger flights logged, the EIA estimated that global consumption of jet fuel is down 69% from a year ago. Data published in the last week by the major oil and gas companies confirms this.

BP reported its jet fuel sales volume were 70% lower than a year ago. ExxonMobil reported its worldwide production of aviation fuels fell to 147,000 bbl/d, down 62% from a year ago.

Disclaimer: Investing in any asset class is risky. The above should not be taken as financial advice, nor construed as so. Always do your own research before investing or consult with a professional financial planner.

Disclosure: The author of this opinion piece does not hold stock in oil and gas companies and does not have a position in energy commodities. Keefe is an analyst at Quantum Economics.