A Brutal Earnings Season

COVID Market Update

Lackluster short-term oil demand is still holding oil benchmarks back and creating a mountain of headaches for oil companies that require higher prices to break even. Despite cheap crude that would otherwise be attractive to major importers, major flooding in China this week (in an industrial-heavy area no less) is threatening to sap demand from the world's largest oil importer.

The world's third-largest oil importer, India, is also scaling back purchases of cheap crude, sinking to 10-year lows in June as its refineries shut down for maintenance--and July isn't much better.

The recent upward curve in air passenger traffic is now flattening, and some major companies, including Google, have extended work-at-home offerings until at least next July--further hitting demand.

On top of that, China/U.S. tensions continue to unsettle an already jittery oil market.

While U.S. crude inventories were a draw this week, it came as small consolation after the previous week's surprise build.

So bleak are the current demand signals that it would appear contango for oil is back, with front-month September Brent futures trading at a deep discount ($2) to March 2021 futures. This contango is the strongest sign that the global glut has returned.

Discovery & Development

The biggest--and only--story on the discovery scene is Apache Corp and Suriname.

Apache and its JV partner French Total SA announced their third oil discovery offshore Suriname this week. The new find was at the Kwaskwasi-1 well drilled offshore Suriname in Block 58, which comprises 1.4 million acres. This is Apache/Total's third major discovery offshore Suriname, following the January discovery of the Maka Central-1 well and the April discovery of the Sapakara West-1 well. At Kwaskwasi-1, Apache encountered 278 meters of net oil and volatile oil/gas condensate pay.

Now, the duo is on to the fourth well, Keskesi, also in Block 58, and drilling there will start immediately.

The block is part of the prolific Guyana-Suriname Basin and neighbors the Stabroek block, where Exxon/Hess put Guyana on the map with a huge string of discoveries. Now, Apache is on track to do the same for Suriname, which has estimated oil reserves of 92.5 million barrels and some 17.1 million barrels of probable oil reserves.

Apache/Total were also two of the standouts among Q2 earnings reports. Yes, Apache reported a loss of $386 million in Q2 after its US production fell to just 251,000 boepd--down 11% on the quarter--and a global production drop to 435,000 boepd, from 468,000 boepd in Q1. But it kept spending in Q2 to $216 million from the nearly $600 million it spent in Q2 2019, and expects to spend under $200 million in Q3. Compared to the industry's otherwise dismal earnings, and adding on the timing of a third Suriname discovery, Apache and Total are looking pretty good.

Deals, M&A, ESG Megatrend

• Deutsche Bank will immediately stop all investments in Arctic oil projects and oilsands projects. The bank will also review financing for all coal, oil, and gas projects at the end of the year. The ESG megatrend pioneered by BlackRock continues, unabated...

• Brazil's Petrobras is looking to divest its entire stake in the Tayrona exploratory block in Guajira Basin, Colombia, as part of its effort to reduce its heavy debt load. Petrobras holds 44.44% in the deepwater concession, with Ecopetrol holding the rest. Ecopetrol has first dibs on Petrobras' stake.

• Occidental Petroleum is reportedly in talks to sell its assets in Africa and the Middle East to Indonesian's Pertamina for $4.5 billion, narrowing in specifically on assets in Ghana and the UAE.

• China's CNPC is in talks to acquire BP's 10% stake in Oman's Khazzan natural gas field. BP owns a 60% stake in the project, Oman Oil has a 30% stake, and Petronas has a 10% stake which it bought from Oman Oil a couple of years ago. Khazzan natural gas field is one of the Middle East's most abundant unconventional gas resources. The total proven reserves of the field are around 100 trillion cubic feet.

• The Iraqi government has awarded Japan's JGC Corporation contract to build a 55,000-bpd refinery in Basra province in a project valued at $4 billion. The refinery will produce fuels including liquified petroleum gas, gasoline, and gasoil.

• Permian producer Rosehill Resources filed for bankruptcy protection this week. It will now become a private company, owned by some of its creditors. Nasdaq has already started the process of delisting the company, and it will suspend trading as of August 5.

Earnings/Writedown Season

Another bleak earnings season is kicking off, and by and large, oil and gas companies are expected to continue the writedown mania that saw more than $40 billion in assets written down so far.

• Total SA is the first on our list this week, writing down $8.1 billion in assets for Q2--a consequence of adjusting downward its oil-price expectations. Total's writedowns are mainly attributed to its oilsands assets in Canada, and includes some LNG assets in Australia as well. For Q2, Total saw its net profit dip by 96%, while oil and gas production was down 4%. Like Exxon, it is for now holding onto its dividend, holding that steady. The French oil giant's net profit came in at $126 million for the quarter.

• Shell, too, wrote down $16.8 billion in Q2, which consequently led to a loss of $18.4 billion of net profit for the quarter. Shell said Big Oil's Q2 reports would be "horrendous", and Shell was not spared from that fate. Shell's Q2 profit fell 82%, to $18.4 billion for net income attributable to shareholders (Shell's proxy for net profit).

• ConocoPhillips reported weaker than expected earnings, with a net income of $300 million, down from $1.6 billion during the same quarter last year. This is $0.24 EPS for Q2 2020, compared to $1.40 EPS Q2 2019. Conoco's adjusted loss per share was $0.92 on revenue of $4.02 billion. This was worse than the $4.23 billion analysts had expected.

• Husky reported a net loss of $304 million for the quarter, compared to a profit of $307 million a year ago. Production fell for the quarter by 8%, to 247,000 boepd, while the average price for its blended crude fell 64% to $24.36 per barrel. Husky is expecting full year spending to be between $1.6 billion and $1.8 billion. Excluding items, Husky lost C$0.30 per share.

• Texas-based refiner Valero Energy reported a quarterly loss of $1.25 per share, compared to analyst predictions of a $1.42 per share loss. This is compared to $1.51 earnings per share last year. Valero's revenues for the quarter came in at $10.4 billion, 34% below analyst estimates, and down from $28.93 billion a year ago.

• While most oil majors are busy writing down assets, Brazil's state-run oil company Petrobras is looking at a positive adjustment to its Q2 report of $3.27 billion from a tax ruling in its favor after it realized it overpaid its PIS and Cofins taxes.

• Reliance Industries Ltd. broke from the herd this quarter, reporting a record rise in profit after its deal with BP Plc and wireless phone proceeds, which offset its less profitable oil business. Reliance reported its net income at $1.8 billion for the quarter.

• Permian-based E&P company Concho Resources Inc posted a major loss for Q2 with the average realized price for its crude oil falling more than 15% for the quarter compared to a year ago. Concho posted a net loss of $435 million for the quarter, or $2.23 per share, down from a loss of $97 million, or $0.48 per share loss a year earlier.

• Calgary-based Crescent Point Energy Corp (NYSE: CPG) reported a Q2 loss of $104 million with an EPS of -$0.27 per diluted share, compared with a profit of $0.36 per share for the same quarter last year. CPG produced an average of 120,842 boepd for the quarter, after voluntarily shutting in about 25,000 boepd in response to low oil prices and waning demand. This compares to production of 172,476 boepd for the same quarter last year. Revenues were $259 million, down from $945.2 million for Q2 2019.

• Three major companies in the oilfield services industry, Schlumberger, Halliburton and Baker Hughes wrote down $45 billion in assets over the past year as their clients tightened their belts. Schlumberger, with a market cap of $27 billion; Halliburton, with a market cap of $13 billion; and Baker Hughes, with a market cap of $17 billion, have a combined market cap that is just $12 billion over the total amount written down.

• Exxon reported a worse loss than expected for the quarter. While analysts had expected a loss per share of $0.63, it was actually a loss of $0.70 per share. Revenue was expected to be $36.08 billion, but it came in at just $32.6 billion. Production sank 7% to 3.6 million boepd. Losses mainly stemmed from its upstream business ($1.65 billion in Q2 2020 vs $3.26 billion in Q2 2019), while its downstream segment saw its income double to $976 million. It's chemical income also saw a big boost, more than doubling to $467 million for the quarter. Rumors are swirling that Exxon is getting ready to cut jobs and spending in response to the downturn, but it is desperately trying to hang onto its dividend.

• Analysts had expected Chevron to lose $0.85 per share against revenue of $20.49 billion. This $20.49 billion is a 47% slide from Q2 2019. But while expectations for Chevron's Q2 performance was already bad, the reality was worse. Chevron actually lost $1.59 per share against revenue of just $13.49 billion. It lost on its upstream segment (-$6.09 billion compared to +$3.48 billion in Q2 2019), and its downstream segment lost $1.01 billion compared to +$729 million in Q2 2019.