COVID Market Update
The oil and gas market’s appetite is now shifting. As dismal Q2 financials flood in, lowered market expectations is seeing disastrous quarterlies as bad, and bad quarterlies as okay. Okay financials are met with resounding cheers.
And investors are voting with their precious dollars amid the pandemic and rewarding fiscal responsibility with enthusiasm.
The best evidence of this is BP, who reported a $17 billion loss for the quarter. Of course, this was to be expected. The oil behemoth also slashed its precious dividend by half, committed to cutting spending, and promised to stop exploration in new countries within the next 10 years. It is also planning to reduce its production by 40% within that time frame. The market cheered these prudent changes, sending BP’s share price higher.
Other oil and gas companies who took a different path suffered a different fate. The markets were less pleased with Exxon, who maintained its dividend in these tough times. After its earnings were reported last week, Exxon’s stock fell. Now, Exxon is warning investors that it could lose up to 20% of the value of its oil and gas reserves if low prices continue through 2020. It’s also cutting its drilling budget by $10B and has already taken one billion barrels off its books from shale fields for the most part.
It is just one example of the market’s expectations. Fiscal responsibility--even at painful levels--will be rewarded. Meanwhile, hanging onto…
COVID Market Update
The oil and gas market’s appetite is now shifting. As dismal Q2 financials flood in, lowered market expectations is seeing disastrous quarterlies as bad, and bad quarterlies as okay. Okay financials are met with resounding cheers.
And investors are voting with their precious dollars amid the pandemic and rewarding fiscal responsibility with enthusiasm.
The best evidence of this is BP, who reported a $17 billion loss for the quarter. Of course, this was to be expected. The oil behemoth also slashed its precious dividend by half, committed to cutting spending, and promised to stop exploration in new countries within the next 10 years. It is also planning to reduce its production by 40% within that time frame. The market cheered these prudent changes, sending BP’s share price higher.
Other oil and gas companies who took a different path suffered a different fate. The markets were less pleased with Exxon, who maintained its dividend in these tough times. After its earnings were reported last week, Exxon’s stock fell. Now, Exxon is warning investors that it could lose up to 20% of the value of its oil and gas reserves if low prices continue through 2020. It’s also cutting its drilling budget by $10B and has already taken one billion barrels off its books from shale fields for the most part.
It is just one example of the market’s expectations. Fiscal responsibility--even at painful levels--will be rewarded. Meanwhile, hanging onto traditional tactics--like maintaining a dividend without the cash on hand to pay that dividend--is likely to be regarded as reckless.
- Offshore oil drilled Fieldwood Energy filed for bankruptcy, along with more than a dozen affiliates, for its second bankruptcy in just more than two years. The court filings show that the Houston-based company, one of the largest operators in the Gulf of Mexico, has $1.8 billion of debt.
- Marathon Petroleum will idle two refineries indefinitely, transforming them into a terminal and renewable diesel facilities. The Martinez refinery has a capacity of 166,000 barrels per day, and the Gallup facility has a capacity of 26,000 bpd. Both were idled in April amid the slump in fuel demand resulting from the national lockdowns.
- Iraqi authorities said they would make additional oil cuts of around 400,000 bpd in order to compensate for the lack of compliance with the OPEC+ agreement in the previous months' cut this month.
Discovery & Development
- Other positive development news comes from just across the maritime border in Guyana, where we see a final end to the election drama, with incumbent president David Granger on August 2nd forced to stand down after the election commission officially declared opposition candidate Irfaan Ali as the winner. Ali took office on August 2nd without incident, marking a peaceful transition that will bode well for Exxon/Hess production plans going forward.
- Guyana also comes with more good news for Noble Corporation, which has just won a 6-month contract from Exxon for its Noble Sam Croft drillship (the same that has been drilling for Apache’s discoveries in Suriname). That helps the bite that came when Noble’s reported a $42-million loss in its Q2 earnings and filed for bankruptcy last week. Noble will start drilling for Exxon in 2020, making its way from the Apache drills in Suriname.
- In Norway, British Neptune Energy and partners announced a “significant” discovery this week in the North Sea. The discovery in the Dugong well is estimated to contain between 40 million and 120 million barrels of oil equivalent and may open up more opportunities in the surrounding licenses for Neptune, which holds a 40% stake in the project.
Deals, M&A, ESG Megatrend
- Brazil’s Petrobras has qualified 12 companies to compete for the leasing of its LNG terminal located in the state of Bahia. In line with a 2019 deal with the country’s anti-trust regulator, Petrobras will exit LNG distribution and transport and will grant others access to its infrastructure. Companies pre-approved to participate in LNG terminal lease tender include Shell, BP, Repsol along with domestic companies.
- Somalia will reportedly announce the winners of its first oil and gas licensing round in early 2021. The auction officially opened early this week. The government previously considered offering 15 blocks in this licensing round but was postponed due to disputes regarding the maritime border with Kenya. Kenya broke diplomatic relations with neighboring Somalia last year after a row over several oil and gas blocks escalated into an open conflict. Of the 15 blocks which were supposed to be offered, only seven will be available.
- Following record losses Q2 2020, BP has announced a new strategy that would reshape the company by reducing oil and gas production by about 40% by 2030, while its refining output will decline by about 30%.
- Shell has exited its shale gas position in the Marcellus and Utica plays as it completed the sale of its U.S. Appalachia assets to National Fuel for $541 million. The assets include 350 active wells, which produce roughly 250 million cubic feet per day of dry gas.
Earnings/Writedown Season
- Pioneer Natural Resources reported a Q2 loss of $0.32 per share, against $2.01 earnings per share this time last year. Revenues for Q2 were $859 million, compared to revenues of $1.92 billion for Q2 2019.
- BP swung to a net loss of $16.85 billion in Q2, compared to a net profit of $1.82 billion for Q2 2019. Along with its earnings report, BP announced that it would cut its oil and gas production over the next ten years, by one million boed compared to 2019 levels. BP is looking at cutting more than just production. It is also cutting 10,000 jobs. BP also announced it would cut its dividend--for the first time in a decade.
- Cheniere Energy reported Q2 earnings per share of $.78, beating analysts estimates by a wide margin. This compares to a loss per share of $0.44 for Q2 2019. Revenues were $2.40 billion for the quarter, compared to Q2 2019 revenues of $2.29 billion.
Politics, Geopolitics & Conflict
- As the entire Mediterranean becomes a fiery stage in the next big oil and gas battle, Greece and Egypt are attempting to counter Turkey by signing a new maritime deal that Turkey has rejected as “null and void”. The Greece-Egypt deal establishes a new exclusive economic zone (EEZ) in the eastern Mediterranean Sea and is a direct response to Turkey’s attempt to do the same with Libya’s GNA. Turkey is balking at the deal, citing the fact that Greece and Egypt have no mutual sea border, while the newly agreed Greek-Egypt EEZ is on Turkey’s continental shelf. Some might have thought that tensions with Greece would get a reprieve when Turkey last week backed away from its exploration for oil and gas off a Greek island in the eastern Mediterranean, but Greece--for one--is not convinced.
- While all eyes are on Libya and Syria has been left to its own devices, the Trump administration has approved a deal for an American firm to develop oil fields in Syria’s northeast, an area shakily controlled by Kurdish-led Syrian Democratic Forces, which in turn are fragilely (today) backed by the United States. Terms of the deal remain elusive at this point and will likely be the subject of a fair amount of scrutiny. Of course, the Assad regime has rejected the deal as illegal as it would essentially usurp Syrian oil for American purposes. The oil firm in question is Delta Crescent Energy, and you will be forgiven for never having heard of it before.
