Friday, August 5 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. Cash flow negative after dividends
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- The oil majors are not generating enough cash to fund both their capex and their hefty dividend payments.
- All of the oil majors are having to take on debt in order to keep their dividends at such high levels. Only ExxonMobil (NYSE: XOM) was slightly cash flow positive over the past 12 months, but that excludes payouts to shareholders. After including dividends, Exxon had negative cash flow of $12 billion.
- The majors are plugging the deficit with more debt. Exxon saw its debt jump from $33.8 billion last year to $44.5 billion at the end of 2Q2016.
- Shell’s (NYSE: RDS.A) debt-to-equity ratio is the worst, rising close to 30 percent. BP’s (NYSE: BP) debt ratio is not far behind at about 25 percent. Debt ratios are sharply up from 2015.
2. Dividend yields too high?
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- The poor earnings from the oil majors is putting renewed scrutiny on their generous dividend payouts. Companies are taking on more and more debt to pay shareholders, but that cannot continue forever.
- The cash flow of the five largest oil…
Friday, August 5 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. Cash flow negative after dividends
(Click to enlarge)
- The oil majors are not generating enough cash to fund both their capex and their hefty dividend payments.
- All of the oil majors are having to take on debt in order to keep their dividends at such high levels. Only ExxonMobil (NYSE: XOM) was slightly cash flow positive over the past 12 months, but that excludes payouts to shareholders. After including dividends, Exxon had negative cash flow of $12 billion.
- The majors are plugging the deficit with more debt. Exxon saw its debt jump from $33.8 billion last year to $44.5 billion at the end of 2Q2016.
- Shell’s (NYSE: RDS.A) debt-to-equity ratio is the worst, rising close to 30 percent. BP’s (NYSE: BP) debt ratio is not far behind at about 25 percent. Debt ratios are sharply up from 2015.
2. Dividend yields too high?
(Click to enlarge)
- The poor earnings from the oil majors is putting renewed scrutiny on their generous dividend payouts. Companies are taking on more and more debt to pay shareholders, but that cannot continue forever.
- The cash flow of the five largest oil majors dropped to negative $23 billion combined for the past four quarters.
- As the share prices of the oil majors shot up in the second quarter during the more-than-80-percent rally in crude prices, the dividend yields fell to more sustainable levels.
- But with oil back down, so too are the share prices of the majors. And the cash flow deficit and rising debt levels raise questions about the long-term stability of their dividends.
- BP (NYSE: BP) and Shell (NYSE: RDS.A) have dividend yields over 7 percent; Total’s (NYSE: TOT) stands at 5.8 percent; Statoil (NYSE: STO) gas a yield at 6.9 percent; Eni (NYSE: E) actually cut its dividend in 2015 but still has a yield at 6 percent; and Exxon (NYSE: XOM) has a more sustainable 3.4 percent yield.
3. India largest source of demand growth
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- From here on out, India will be the largest source of demand growth for oil, even more important than China.
- India’s oil consumption will surge by 6 million barrels per day through 2040, the equivalent of adding two-thirds of the U.S.’ entire supply today.
- India’s 6 mb/d of additional demand makes up more than a third of the entire world’s expected 15.6 mb/d increase in demand over the next 25 years, according to the IEA. China’s oil demand will continue to grow, but India will be the largest contributor to demand.
- Even more enticing for oil exporters, India has very little prospect of domestic production. It already relies on imports to meet 80 percent of its oil and gas demand, and domestic production has been falling for years. It also has very small reserves.
4. Crude-by-rail declining
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- Crude-by-rail shipments in the U.S. averaged just 443,000 barrels per day in the first five months of 2016, 45 percent lower than 2015 levels.
- Half of the decline comes from falling shipments from PADD 2 (Midwest) to PADD 1 (East Coast), the most active route for rail shipments. East Coast refiners buying up cheap Bakken crude were the largest driver of oil-by-rail shipments over the last few years.
- The decline in rail stems from the shrinking WTI/Brent spread; the addition of new pipeline capacity, which is cheaper than rail; and falling U.S. oil production, particularly in the Bakken.
- Since WTI is no longer substantially discounted to Brent, East Coast refiners can import more oil from abroad at a cheaper price than shipping it by rail from the Midwest.
5. Tesla burning through cash
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- Tesla is a media and investor darling, despite its poor financials to date.
- Tesla’s latest quarterly earnings missed expectations by 77 percent, the largest ever, according to Bloomberg Gadfly.
- Tesla has burned through $4.5 billion over the past five years, and has plans to ramp up spending.
- But nobody seems to care. Tesla’s stock performance has not tracked earnings results at all, and the share price remains aloft despite the losses. Wall Street still has faith that the EV (and now solar panel and energy storage) company will eventually reap larger profits. But success remains elusive for now.
6. Investment banks don’t forecast large price gains
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- A survey by the WSJ of 13 investment banks shows an average price forecast for 2017 at $56 per barrel for Brent and $55 for WTI. That is one dollar lower than the June forecast, reflecting less confidence in a rally in the months ahead compared to what the banks thought in June.
- RBC comes in at the high end with a price forecast just under $70 per barrel by the fourth quarter of 2017. ING Bank is the most pessimistic with a price forecast in the mid-$40s through the end of next year.
- Only a few of them expect oil to rise above $50 before the end of 2016.
- The relatively pessimistic forecasts mirror the increasingly bearish position that oil traders have taken in recent weeks, as confidence in the market has plunged along with the price of crude.
7. Dollar and oil correlation positive again
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- The U.S. dollar usually trades inversely to oil prices – since oil is priced in dollars, a stronger dollar makes oil most costly, pushing down demand. So when the dollar rises, oil prices fall, and vice versa.
- But earlier this year, when oil prices hit low points, the dollar and oil traded developed a temporary positive trading relationship. That positive correlation opened up again in the last few days.
- Recent stimulus measures from Japan disappointed, putting downward pressure on the dollar at the same time that crude was falling because of fundamental supply/demand reasons.
- Just as we saw earlier this year, the positive correlation will probably be short-lived. Dollar strength will be negative for oil and a falling greenback will help lift oil prices.
That’s it for this week’s Numbers Report. Thanks for reading, and we’ll see you next week.