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Oil Majors Report Bleak Earnings As Glut Persists

Oil Majors Report Bleak Earnings As Glut Persists

As oil tanked below $30 again, we will take a quick look at some of the critical figures and data in the energy markets this week. The rally in oil looks like a distant memory as expectations of a Russia-OPEC deal start to fade.

We will then look at some of the key market movers early this week before providing you with the latest analysis of the top news events taking place in the global energy complex over the past few days. 

(Click to enlarge)

Chart of the Week

 

(Click to enlarge)  Related: Russia Cries Dyadya (Uncle), Is Saudi Arabia Listening?

• The EIA released the latest monthly production data from the U.S., and it revealed that the incredible resilience from U.S. oil production continued well into the fourth quarter of 2015.
• The EIA publishes weekly and monthly oil production figures, with the retrospective monthly figures offering a more accurate picture of output levels.
• The latest monthly figures are for the month of November 2015, and they show that U.S. oil production only dipped from 9.37 million barrels per day (mb/d) in October to 9.318 mb/d the next month, a decline of just 52,000 barrels per day.
• The drop off is dramatically smaller than many had predicted, and suggested the adjustment period could continue to be drawn out. That is bad news for oil prices.

Market Movers

BP (NYSE: BP) reported its 2015 earnings, posting a 91 percent decline in fourth quarter earnings compared to 2014. The oil giant reported a full-year loss of $6.5 billion, the worst in 30 years. BP’s share price was off by more than 8 percent on Tuesday.
ExxonMobil (NYSE: XOM) reported on Tuesday as well, with 2015 earnings dropping by half to $16.2 billion, compared to the $32.5 billion in earnings from 2014. The fourth quarter was worse, however, with earnings dropping to $2.8 billion, a 58 percent decline from the same period in 2014. Still, that was much better than its peers.
• The S&P downgraded the credit ratings for Royal Dutch Shell (NYSE: RDS.A), and placed several more on watch for possible downgrades, including Shell, BP, Eni (NYSE: E), Repsol (OTCQX: REPYF), Statoil (NYSE: STO), and Total (NYSE: TOT).

Tuesday February 2, 2016

The prospect of cooperation between OPEC and Russia was always a long shot, and the markets apparently have started to come around to that realization. Crude prices fell sharply at the start of this week as hopes faded for coordinated production cuts. Related: This Could Be A Big Setback For Iran’s Oil Export Plans

Russia revealed that it hit another post-Soviet record high in oil production in January, breaking the previous record set in December. Output stood at 10.88 mb/d. Venezuela’s oil minister Eulogio Del Pino visited Moscow to discuss the possibility of coordinating with OPEC but nothing new came from the meeting. Venezuela is desperate for oil prices to stabilize, but Russian officials merely issued the same suggestions that they did last week, which was that they were open to discuss the possibility. Investors should not expect much to come from this unless more concrete pledges are issued by all parties involved.

The latest manufacturing data from China also poured cold water on oil prices at the start of the week. China’s manufacturing purchasing managers index dropped to 49.4 in January, down from 49.7 in December. A reading below 50 indicates a contraction. January was the sixth consecutive month of a contraction, and manufacturing activity in China is now at its lowest level since August 2012.

BP and ExxonMobil reported earnings on Tuesday. BP posted the worst loss in recent memory, down $6.5 billion for the full-year of 2015. Earnings were down by 91 percent in the fourth quarter, which was also the sixth consecutive quarter in which earnings were lower than the previous. BP’s market cap is now below $100 billion for the first time since the Deepwater Horizon disaster in 2010.

ExxonMobil fared better, with earnings of $16.1 billion for the full-year, although those figures were 50 percent lower than for 2014. The oil majors continue to show determination in sticking to their dividend policies, although it is unclear how long that can keep up. Net debt continues to rise in order to fund the generous dividends.

Decommissioning oil rigs in the North Sea could accelerate this year because of low oil prices, according to Wood Mackenzie. The North Sea has high production costs and many producing fields are in the waning years of their operating lifespans. Companies are trying to squeeze out the remaining reserves, but low prices could force up to 50 oil and gas fields to permanently shut in production this year. After that, the platforms and rigs that have been in place for decades would be decommissioned. The smaller and more expensive fields are where the industry will start first, but Wood Mac expects 140 fields in UK waters to be shuttered over the next five years. Decommissioning brings its own set of costs, and some companies might rather continue to pump than take on the costs of dismantling infrastructure. Nevertheless, decommissioning in the North Sea will pick up and will become its own growth industry in the years ahead.

The provincial government in Alberta released a new energy framework that left royalty rates unchanged, a welcome move from the industry that had feared a hike in costs. Alberta’s government had previously hinted that it would increase royalty rates on the industry, but the downturn in oil prices may have changed that calculus. The existing rates will now stay in place for ten years for oil wells drilled before 2017. "It's not the time to reach out and make a big money grab," Alberta Premier Rachel Notley told reporters. Voices from top executives from Canada’s oil industry praised the move.

Saudi Arabia is hoping to replicate a successful strategy that it used in the United States to lock down market share. In 1988, Saudi Aramco bought some refining assets in the U.S. Gulf of Mexico, taking a 50 percent stake in Texaco’s refining operations. That contributed to Saudi Arabia maintaining relatively stable levels of crude oil exports to the U.S. Now Saudi Aramco is looking to do something similar in China. Saudi Aramco Chairman Khalid al-Falih recently told reporters that the Saudi oil giant was in talks with China National Petroleum Corp. (CNPC) and Sinopec on joint ventures in “many refineries.” Related: Banks On The Hook For Bad Energy Loans

The strategy could be central to beating back competition from Russia. Saudi Arabia exported about 1 million barrels of oil per day (mb/d) to China in 2015, slightly up from the year before. However, in terms of market share, Saudi Arabia is starting to lose ground. Saudi Arabia supplied China with 15 percent of its oil imports last year, which is down from 16 percent in 2014 and 20 percent in 2012. The difference is that Russia’s exports to China have ramped up, jumping 28 percent in 2015 compared to 2014. That gave Russia a market share of 12 percent in 2015, up from 10 percent the year before.

We looked at Chevron’s (NYSE: CVX) earnings last week, but the oil major also made news when it revealed that it scrapped or deferred some pretty high-profile upstream projects. Chevron suspended plans on a $500 million deepwater project in the Gulf of Mexico. It also declined to move forward on an oil project at the well-known Tenghiz field in Kazakhstan. In comments that raised eyebrows, Chevron’s CEO John Watson said that drilling in the Permian Basin in West Texas is simply more attractive than these other projects today.

The U.S. Senate is taking a stab at the first major energy legislation since 2007 this week. The effort won’t tackle controversial issues such as oil and gas drilling or climate change, but instead focus on a narrower set of priorities. That includes permanently renewing the Land and Water Conservation Fund while also speeding up the process to approve LNG export terminals at the federal level. The bill will also update energy efficiency standards and address some cyber security for the electrical grid. Because the bill only attempts to confront less contentious energy issues, it actually stands a decent chance of becoming law.

By Evan Kelly of Oilprice.com

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