It’s the start of a full reporting week for oil companies large and small from the sharp fall in prices.
It’s going to be a flood of bad news and red ink, unseen for decades from the likes of Shell, ConocoPhillips and Chevron, with BP, ExxonMobil and others to follow starting this week.
These and other companies offshore and in Australia will be releasing 4th quarter (and in many cases full year financial details) financials as well as production and sales reports.
Much of the financials and production and sales figures will be of historical interest only and will only show a small impact of the slide in oil and gas prices, which accelerated in December and January to the point where global futures prices stand 60% or so below their levels of last June.
Much of the real damage is to come and if oil prices remain around current levels of less than $US50 a barrel for the next few months, these companies will face more pressure deeper cuts to spending on exploration and development; they will also come under pressure to slow spending on existing projects even further (or to cancel them), and balance sheet values will take another pounding.
Morgan Stanley reckons investment in oil and gas exploration and development could fall 20% or $US28 billion by 2017 from last year as companies try to protect dividends by attacking costs.
And Wood Mckenzie said in its 2015 oil report, released at the weekend that companies will need to cut overall costs by $US170 billion, or 37%, to maintain net debt at last year’s levels, assuming a price of $US60 a barrel for Brtent crude.
At less than $50 a barrel, Brent is now 50 per cent below the 2014 average of $99.
“Lower oil prices pose the biggest threat to oil and gas industry earnings and financial solidity since the financial crash of 2008,” Wood Mackenzie warned in the report
For many companies profits (losses?) this quarter and the three months to June will be sharply lower than those for the December quarter. Losses in the hundreds of billions of dollars will be the order of the day.
We have already had a spate of first round reports of job cuts (BP, Schlumberger, Baker Hughes and Halliburton have cut close to 30,000 jobs between them alone) and billions of dollars in production spending cuts, reductions in exploration spending, overheads and warnings of possible reductions in dividends, especially among service companies and other suppliers.
Some of these companies have already revealed impairments and other losses – Schlumberger have announced a $US1.7 billion charge, BP $US1 billion, Chevron and ConocoPhillips have hinted at multi billion dollar losses as well.
Big drilling companies, such as Seadrill and Transocean have already revealed huge impairment losses and warned that dividends will be threatened.
The damage done to the service sector – companies like Baker Hughes and Schlumberger, will be repeated here (but on a smaller scale) with the likes of WorleyParsons being damaged. Titan Energy services has already owned up to problems.
Although the big oil companies like BP and ExxonMobil will do everything to avoid cutting dividends, which would undermine their credibility with investors and possibly set up speculation about takeovers (with BP being the prime candidate), the longer prices continue at current levels, the greater the pressure to cut or drop dividends to conserve cash.
The focus now will be on asset impairments -which many companies have hinted at because the values in their balance sheets can’t be justified by oil prices at less than $US50 a barrel.
So the focus on the impact of the big oil price slide will become clearer this week with quarterly and full year reports from the likes of giants such as Shell, Chevron and ConocoPhillips (and ExxonMobil and BP the week after), plus chemical giants such as Dow and Du Pont (which should be big beneficiaries of the slide in lower oil, gas and petrochemical costs).
Shell is out late in the week and is actually forecast to report a higher profit – but analysts say that will be because the same quarter of 2013 was so bad with big write downs (it issued a profit downgrade in mid January, 2014).
Shell has an estimated $US12 to $US14 billion of assets on the market (including 5% of Woodside), and few buyers.
At home we have already had a $700 million cut from Santos in capital investment for 2015, and hints of impairments and other losses to be made public with the annual results next month, and industry leader, Woodside will be making a similar statement with its annual figures next month as well.
BHP has already revealed cuts in the value of its US shale gas holdings of up to $US250 million, cut exploration by 20% and will have other details with its interim profit report next month,
This week Oil Search releases its December quarter and 2014 production and sales figures on Thursday.
It has already pointed to the very positive impact from the start of the huge PNG LNG project, but investors will be waiting to see what the company says about the impact of the 50% plus plunge in oil prices has on its 2015 exploration and development spending, and on asset values in its balance sheet. Like the others OIl Search produces its 2014 financials next month.
Struggling Santos is a shareholder in the PNG project and investors will get a line on its financials (and any write downs, if they happen with Oil Search).
Beach Energy and Origin Energy will also report their December quarter figures and half year production and sales figures.
Their reports will also be scrutinised by analysts to see if there are signs (like there was in Woodside, BHP Billiton and Santos’ reports) of asset impairments, cost cutting and other losses. Both Origin and Beach report financials next month and they won’t make pretty reading.
