Listen and watch what oil companies are doing – not what’s happening in the oil futures market.
The companies’ actions tell us more than the markets are at the moment – the weak outlook for oil and gas is not changing any time soon, despite all the bullish talk about a price rebound.
Just look at what oil services giant Schlumberger said and did overnight, and what Woodside (WPL) shareholders heard in Australia a few hours earlier.
There’s more realism about the outlook for oil and gas from those two companies than what we are seeing in the futures market.
Global oil prices are now up 12% in the past six trading sessions, there are rising hopes among many traders (read speculators and desperate company managements) that the surge in US oil production (from shale) is finally ending.
With this week’s weak update on higher stocks (just over 1 million extra) and the second weekly fall in production in the past three weeks, more and more traders believe US stocks will show their first weekly fall for months in the next fortnight, and US output will finally start falling.
And when this happens, prices will explode upwards and this price shock will be over (that’s ignoring the oil coming from Iran, if the deal with the US and Europe holds and is signed).
The rig use count in the US has been falling for weeks and signalling something like this for the past two months in particular, but so far not much has happened.
The bull case for a rebound in oil prices is the ruling narrative and many people see it coming (if it hasn’t arrived already) regardless of the realities of the supply (too much) demand equation (its still weak).
But don’t believe it – instead look at what the oil companies and their suppliers are doing – and its cut, hack and slash, day after day.
Take the latest quarterly results overnight Thursday from Schlumberger – the world’s biggest oil services company (and its getting bigger by buying smaller rival Baker Hughes).
They were not good so the company has stepped up the hacking and slashing to cut costs.
Even giants are not immune from reality – Schlumberger revealed a 39% slump in first quarter earnings (on a 9% fall in revenue in the quarter), and cut another 11,000 jobs from its payroll around the world, on top of the 9,000 jobs losses announced earlier this year.
Schlumberger explained the new cuts were a “result of the severe fall in activity in North America” along with weaker activity overseas.
The total cut is now 15% of the company’s pre-merger work force (and there will be thousands of extra jobs lost when that happens).
And it sees industry spending falling 15% this year across the globe, so more cuts.
In Australia yesterday, Woodside shareholders were told at the company’s AGM in Perth to expect the current depressed conditions in the industry to continue for another couple of years. That means a big cut in dividend is coming for the country’s major independent.
Chairman Michael Chaney told shareholders that Woodside had “performed strongly in 2014 in the face of what became a particularly challenging year for the oil and gas industry worldwide”.
“It is impossible to predict just how long this lower oil price environment will last, but the company is planning on the basis that it could be for several years.”
So from Woodside’s point of view – no quick fix and rebound from any price rise – just more tough trading conditions.
Woodside reported a record underlying net profit of $US2.4 billion in 2014, up 42 % from 2013, and a level we won’t see repeated for a while.
"There is no doubt that 2015 will be a challenge globally for the oil and gas industry," said Mr Chaney. "Improving costs will continue to be a real focus for our business in 2015."
In March, the company announced it would slash 300 jobs and freeze pay throughout the company. The cuts come on top of the loss of 320 jobs in 2014. And in announcing the 2014 full-year results in February, Woodside said it would slash its 2015 operating expenditure by around 15%.
Woodside shares closed up 0.2% on Thursday at $US35.48.
Remember Woodside gave us a taste of what’s to come in 2015 earlier this week in its March quarter report. It said its revenue dropped 16% in the three months to March.
A combination of the big slide in global oil and gas prices, plus cyclonic weather in the quarter saw revenue drop 15.9% to $1.4 billion in the three months ended March 31 from the same quarter of 2014, and 20.1% from the December quarter of the same year.
Production levels dropped 5.2% to 21.8 million barrels of oil equivalent in the March quarter compared to a year ago. It was down 6.8% from the December quarter.
Woodside blamed lower production levels on lower liquefied natural gas (LNG) volumes at its giant Pluto project and lower oil volumes – both in part to cyclone activity.
“During the cyclone a submersible drilling rig under contract to another party drifted near Pluto flowlines and resulted in a six-day precautionary production shut-in,” Woodside said in yesterday’s report.
"This was partially offset by increased LNG volumes at north-west shelf following the Train 1 planned maintenance in the last quarter of 2014."
Lower sales revenue reflected "lower oil and condensate sales volumes and lower oil prices, partially offset by higher LNG sales volumes."
Woodside said that it was on track to meet its 2015 production range of 84 million to 91 million barrels of oil equivalent – not counting production from newly acquired Apache assets in Canada and Australia.
But at what price?
