Oil Majors Have Seen Debt Double And Spending Fall 45%

Friday, May 27, 2016

In the latest edition of the Numbers Report, we'll take a look at some of the most interesting figures put out this week in the energy sector. Each week we'll dig into some data and provide a bit of explanation on what drives the numbers.

Let's take a look.

1. Rising debt for oil majors

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- The oil majors are taking on ever more volumes of debt in order to finance their spending programs and maintain generous dividend policies. 
- The six largest oil companies have issued $37 billion in new debt so far this year, double the levels from 2014 when oil prices were at their highs. 
- Generous interest rate policies from central banks have kept the appetite for top-quality debt high, meaning that the oil majors can borrow cheaply. 
- Borrowing costs are at their lowest level in more than a year as oil prices have rebounded from lows. BP (NYSE: BP) issued $1.25 billion in new debt in April with yields of only 3.12 percent. Shell (NYSE: RDS.A) offered $1.5 billion in fresh debt at a 1.99 percent yield. 
- Still, with cash flows not high enough to cover capex and dividends, net debt at all of the oil majors is rising.

2. New discoveries at 64-year low

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- The global oil industry only discovered 12.1 billion barrels of new oil in 2015, the lowest total since 1952. 
- Part of the terrible result last year is due to the fact that exploration spending across the industry fell by 45 percent to $95 billion.
- But it is also the fifth consecutive year of decline. In other words, new discoveries were falling even before oil prices collapsed. Discoveries were low between 2012 and 2014, when oil prices often traded in the triple digits. 
- In the short run, the upstream failure won't matter much…there is plenty of supply. But over the long run, the markets will need to reckon with what is a five-year stretch of an extremely low rate of discovery. And with oil prices now at just under $50 per barrel, the discovery rate probably will not pick up in the near- to medium-term.

3. Gazprom sees cash flow plunge

- Gazprom will see its cash flow swing negative this year for the first time in more than a decade as European natural gas prices plunge to their lowest levels in recent memory. 
- As the FT notes, Gazprom's market cap has crashed by 86 percent since 2008 in dollar terms. 
- Natural gas prices have plunged because they are linked to oil prices, but also because a glut of LNG is leaving Europe very well supplied. U.S. began shipping LNG to Europe this year, which will put a ceiling on Gazprom's ability to charge for natural gas. 
- Unless Gazprom slashes capital expenditures, it will have to take on ever-increasing volumes of debt. Net debt will double by 2018 or 2019 from $29 billion at the beginning this year. 
- The rising levels of debt could force Gazprom to cancel major projects, such as the massive natural gas pipeline that is supposed to connect Siberian gas fields to China.

4. Operating margins better at Schlumberger

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- Schlumberger (NYSE: SLB) has a higher operating margin than its two largest competitors, Halliburton (NYSE: HAL) and Baker Hughes (NYSE: BHI), which helps explain why the latter two tried to tie the knot in order to better compete. 
- Margins for most oilfield service companies have dipped into negative territory, but have stayed positive for Schlumberger. 
- Schlumberger has managed to keep costs down better than its competitors. It even financed much of its $1.9 billion in share buybacks through cash flow from the past year. 
- Bloomberg reports that Schlumberger is hoping to upend the oilfield services model, convincing the majors to contract out the service companies for full projects, rather than only individual parts of a project. This integrated approach, which will allow the service companies to offer an array of services and technologies, would incentivize innovation and lead to healthier bottom lines for both sides.
- Schlumberger hopes to pioneer this new approach, and its purchase of Cameron International in 2015 is based on that strategy.

5. FID decisions plunge

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- Low oil prices have led to a substantial decline in new FID actions. Only 0.63 million barrels per day in new oil production were sanctioned in 2015, followed by 0.6 mb/d in 2016. 
- According to Washington DC-based think tank SAFE, that is down from an annual average of 2.7 mb/d between 2005 and 2014.
- Morgan Stanley says the plummeted volumes of oil in new FIDs will lead to a cumulative global oil supply capacity that is 4 mb/d less in 2018-2020 relative to 2014 estimates. 
- Half of that shortfall is concentrated in the U.S. 
- Today's investment decisions are sowing the seeds of the next supply crunch, which could start to be felt in earnest towards the end of the decade.

6. Non-OPEC production falling fast

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- Oil supplies are declining at a steady but relatively substantial pace. 
- PIRA estimates that non-OPEC production will fall by 1.4 million barrels per day by the third quarter of this year. 
- U.S. data backs up that trend. U.S. oil production, down to about 8.76 mb/d, is down roughly 900,000 barrels per day year-on-year as of May. More declines, by all accounts, are coming for the rest of the year. 
- Oil prices are already showing life, rising to $50 per barrel. As more declines set in over the second and third quarters, there will be upward pressure on WTI and Brent as time goes on.

7. Saudi Arabia oil production near record highs

- Saudi Arabia appears to be abandoning hopes in OPEC and going out on its own, with ambitious plans to revamp its economy and overhaul its oil sector. That could mean that Saudi Aramco ultimately decides to pursue profit maximizing strategies as opposed to oil market stability.
- Saudi Arabia is producing 10.2 mb/d as of the latest estimates, much higher than it typically has for this time of year. As summer approaches, which brings elevated domestic demand, Saudi Arabia is expected to boost output further. 
- The powerful young prince threatened in April that a production spike is possible, saying that the kingdom could ramp up to 11.5 mb/d "if we wanted to." 
- But a more modest strategy is likely. The IEA says that another 300,000 barrels per day will probably come online in the months ahead. With new domestic gas supplies recently coming online for electricity, oil demand could also be 100,000 barrels lower this year, leaving more for export. 
- Saudi Arabia could hit a record high for production this summer.

That's it for this week's Numbers Report. Thanks for reading, and we'll see you next week.