Big Oil Dividends Are Under Threat

1. Silver prices surge

- Even as gold is trading near its highest levels in a decade, silver has gained, even more, closing the gap between the two precious metals.

- At over $20 per troy ounce, silver is trading at a four-year high, rising by 70 percent from its 11-year low in March.

- Gold has only increased 24 percent over that timeframe.

- The gold/silver ratio has fallen below 90 for the first time in five months.

- "As with gold, silver's upswing has been driven almost exclusively by robust investment demand," Commerzbank wrote in a note.

2. Gas demand takes Covid hit, but still rises

- Global natural gas demand has been hit hard by the pandemic and the economic downturn, and the scars will be long-lasting.

- Europe, for instance, will not return to pre-pandemic gas demand levels until 2025. But Asia - especially China - will resume strong growth as soon as next year.

- The softness this year has led to canceled LNG cargoes, full storage, and low prices.

- The demand scars could push off FIDs in new projects.

- "The growth in LNG export capacity begins to slow in 2021 and beyond as the US trains coming on ramp up to capacity," the Oxford Institute for Energy Studies wrote in a report. "There are only a few new projects starting up in the next three years or so."

3. Oil majors' dividends at risk

- Royal Dutch Shell (NYSE: RDS.A) and Equinor (NYSE: EQNR) cut their dividends earlier this year in the face of intense financial pressure. More dividend cuts might be inevitable as the losses pile up.

- The oil majors - Shell, BP (NYSE: BP), Chevron (NYSE: CVX), ExxonMobil (NYSE: XOM), and Total (NYSE: TOT) - are all expected to report a quarterly loss in the second quarter for the first time.

- They borrowed a combined $80 billion during the quarter, giving them financial resources to last during the downturn, but also adding a tremendous burden to their balance sheets.

- Goldman Sachs and Citigroup predict that BP will be the next one to slash its dividend, a cut that could be in the range of between 30 and 65 percent.

- Cutting dividends makes them less attractive, but can provide breathing room. Exxon, for instance, has refused to touch its dividend. Goldman predicts the oil major's debt could surge to $78 billion by the end of 2022.

4. Natural gas stocks are well despite glut and low prices

- Despite a recent jump in Henry Hub prices, natural gas has been trading at record lows this year. This week prices have bounced a little above and below $1.70/MMBtu.

- Hedge funds and other money managers amassed short bets on prices in February and then again in June, according to the Wall Street Journal. There is now a worldwide glut in gas, sinking LNG prices everywhere.

- However, U.S.-based natural gas drillers have seen their share prices rise in recent months. Range Resources (NYSE: RRC) is up 28 percent, EQT (NYSE: EQT) is up 20 percent and Cabot Oil & Gas (NYSE: COG) has gained 6.2 percent.

- One reason is rig efficiency. The amount of gas produced per rig has climbed 10-fold over the past decade, the WSJ notes.

- But production has already begun to decline because of the downturn. That is widely expected to fuel the next bull market, potentially setting the stage for stock gains for gas drillers.

5. Fracking picking up

- New data from Rystad Energy shows a slight pickup in drilling in July. New fracking operations in the U.S. bottomed out at 325 wells in June. Rystad says the U.S. is on track to rise above 400 in July.

- That would be a three-month high. The recovery will be "especially evident in the Permian basin."

- Rystad identified 125 frac jobs in the Permian this month, up 15 and 23 percent compared to May and June, respectively.

- The Permian is averaging 40 to 45 wells per week. All other basins (including the Eagle Ford, the Bakken, Anadarko, and Niobrara) are averaging 35 to 40 wells per week combined.

- Despite the uptick, Rystad sees the rig count remaining at their current lows for another few weeks at least.

6. Refining outlook improves

- Refiners faced a crisis earlier this year when demand collapsed. More recently, demand has softened again in the U.S., raising concerns about a period of weakness. Inventories rose even as refining runs were flat.

- But refining margins have improved, if slowly. "The physical market is trending in line with these dynamics, and we are seeing a widening spread between crude and product time structures at the front," JBC Energy wrote in a note.

- Refining throughputs will remain "constrained," and any future increase in gasoline demand should strengthen margins, JBC added.

- Refiners are not out of the woods yet. The U.S. just posted the second consecutive week of declining gasoline demand, as Covid-19 related curtailed travel takes a bite.

7. Canada's oil-by-rail shipments collapse

- The supply glut in recent months led to a steep drop off in the volume of oil shipped by rail in Canada.

- In May, oil-by-rail shipments fell to just 58,000 bpd, down from 412,000 bpd in February.

- However, the pipeline woes sweeping over the Canadian oil industry raises the odds of a return to oil-by-rail.

- Rail became increasingly critical in late 2018 as upstream supply outstripped takeaway capacity. The bottlenecks forced Albert to impose mandatory production cuts. The loosening of those restrictions over the course of 2019 led to more oil-by-rail shipments.

- In the medium-term, Canada's oil industry wants more long-distance pipelines. Keystone XL is in trouble, pending the outcome of the U.S. presidential election. Trans Mountain faces better odds, although its construction is not entirely assured. Rail shipments will benefit if these projects fall by the wayside.