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Midweek Sector Update: Oil Sector Continues To Feel The Pain

WTI dipped briefly dipped below $50 per barrel on July 20 for the first time in months. The bear market is inflicting a lot of pain on the sector as a whole. But oil service companies are especially feeling the heat.

Halliburton (NYSE: HAL) reported that its profits were down 93 percent in the second quarter from a year earlier, a dramatic fall due to lower oil prices. As oil drillers severely curtailed drilling activity, Halliburton’s services were not in demand. Halliburton posted $54 million in profit for the second quarter, compared to $774 million for the same period in 2014. Revenue dropped 26 percent to $5.92 billion, and revenue for North America plummeted by nearly 40 percent. “To sum things up, this is a damn tough market, one of the toughest ones that I’ve ever been through. And I don’t believe anyone on the call can accurately predict when commodity prices will rebound and rig counts will recover in the U.S. or the international markets, and neither can I,” Halliburton CEO Dave Lesar told investors on a conference call.

Baker Hughes (NYSE: BHI), which will merge with Halliburton, also posted disappointing numbers. With revenue of $4 billion, Baker Hughes saw its revenues fall by 33 percent for the second quarter over the same period a year ago. Its quarterly loss hit $188 million, or 43 cents per share. Related: The Emerging Megatrend Coming To Oil & Gas

Much of that has to do with the lower prices that oil field service companies are charging their customers. When we hear about the significant cost reductions achieved by upstream exploration and production companies, a lot of those costs come on the backs of the service companies. Halliburton and its peers have to slash their rates in order to hold on to some work, but that causes deep gashes in its bottom line. Rig counts are down by more than half from a year ago, falling by over 1,000. And cuts in upstream spending trickle down through to the oil field service companies first.

Bloomberg reports that Wall Street is losing its patience with North American shale drillers. Persistently low oil prices are starving exploration companies of much needed revenues, with smaller companies struggling to keep their heads above water. In the past, creditors have loosened restrictions to keep financial lifelines open, but the days of generosity from Wall Street could be coming to an end. Twice a year, in April and October, credit reevaluations are issued that determine a company’s access to credit. The assessments are based on an individual company’s underlying assets, and with low oil prices, assets are losing value. Companies also locked in hedges last year that provided some protection, allowing companies to sell oil at higher fixed rates. Those positions are expiring, meaning weak companies are increasingly exposed to the full whims of the markets. By October, if oil prices do not rebound, there could be more financial bloodshed as small drillers lose their financial support and potentially run into a debt/liquidity crisis.

Even some larger oil and gas drillers in the U.S. are facing financial pressure. Chesapeake Energy Corp. (NYSE: CHK), announced on July 21 that it would be eliminating its dividend for the third quarter of this year. Chesapeake has been hit hard by low prices for both oil and gas, and its share price is off by about 50 percent since the start of this year. The announcement sparked another 5 percent decline in its share price as of mid-day trading on Tuesday. Chesapeake said that it would divert the resources it was spending on the dividend for operations. Related: Can U.S. Nuclear Plants Operate For 80 Years?

Canadian oil companies are also under the gun. Already reeling from low oil prices, which spurred interest rate cuts from the central bank, a major oil spill in Alberta was reported last week. The operator, Nexen (NYSE: NXY), said that over 5,000 cubic meters of oil “emulsion” – a mix of bitumen, sand, and wastewater – spilled from a pipeline on July 15. The cleanup is ongoing. Alberta has had trouble constructing sufficient pipeline capacity to connect its oil production to markets outside of the province. One of the stumbling blocks has been convincing other provinces, as well as the U.S. federal government, that the pipelines will have a minimal impact on the environment. The latest spill severely damages that claim, and despite evidence that there is no better method to move oil around, the Nexen spill plays into the hands of the oil industry’s environmental opposition.

Despite all the grim news in the energy sector, there are some companies that are doing well during this period of low oil prices: companies that specialize in moving oil. Very large crude carriers (VLCCs) are seeing brisk business with all the cheap crude sloshing around. Tanker rates have climbed by more than 50 percent this year, and the FT reports that daily rates for a supertanker traveling from Saudi Arabia to Japan has hit $93,600, the highest level in seven years. That is good news for supertanker companies, including Teekay Tankers (NYSE: TNK), DHT Holdings (NYSE: DHT), and Nordic American (NYSE: NAT). The industry had hit some hard times in recent years as the supply of supertankers greatly exceeded the volume of oil moving around, pushing tanker rates down. But these days, tanker companies are doing well.

California is suffering from sky-high gasoline prices even as the rest of the country enjoys the benefits of cheap oil. There are a few reasons for the huge disparity. An outage at an ExxonMobil (NYSE: XOM) refinery in Torrance has cut into the state’s access to refined products. The refinery has been offline since it suffered an explosion in February. Some gasoline stations have seen prices spike over $5 per gallon, twice as high as gasoline sold elsewhere in the U.S. Related: Bankruptcies Starting To Pile Up In Coal Industry

Another refinery owned by Tesoro (NYSE: TSO) outside of Los Angeles went offline for routine maintenance recently, causing gasoline prices to jump by over 69 cents at some places in L.A. county. The situation stands in stark contrast to the high supplies of refined products in most parts of the United States. And the high prices that California drivers are paying are attracting gasoline shipments from abroad. At least two tankers of gasoline are expected to arrive from Asia to help ease the shortage. California hasn’t imported gasoline in any significant volumes in years.

U.S. President Barack Obama may have a tricky time selling the Iran deal to a skeptical U.S. Congress. But the rest of the world is on board. The UN Security Council approved the deal, as did the European Union. Germany is moving quickly to revive trade ties with Iran – the German Economy Minister Sigmar Gabriel visited Tehran, becoming the first top German official to visit Iran in 13 years. Germany and Iran had a strong trade relationship before sanctions.

By Evan Kelly Of Oilprice.com

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