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Oil Markets Face Nightmare Scenario

Financial markets saw their worst…

Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Russian Producers Fall Behind As Big Oil Booms

While Big Oil beat analyst expectations with its first-quarter performance, Russia’s biggest player in the field, Rosneft, missed expectations, reporting US$200 million in net profits for the period. The company’s chief executive blamed the discrepancy on higher costs of services and the continuing volatility on international markets.

It seems that the OPEC production cut deal, to which Russia is an important party given that it is one of the top three producers in the world, has been somewhat of a mixed blessing. While it has been good for the state coffers with higher prices in the first quarter raising budget revenues from oil, it hasn’t been so good for the industry.

The price increase pushed the Russian ruble to a high that hasn’t been seen in over a year, which made services more costly for Rosneft and its sector players. According to one local analyst, as quoted by Bloomberg, the ruble effectively offset the gains from the OPEC agreement for the industry.

Rosneft’s net profit was, according to its financial reports, flat on Q1 2016, although revenues and its equity share from joint ventures improved by 71 percent. Free cash flow, which is what pays the bills as industry insiders like to say, declined in the first quarter of 2017, by 6.7 percent, highlighting the ruble troubles of Rosneft. Related: World’s Largest Oil Trader Warns OPEC: Beware For Weak Demand

The other big Russian producers such as Lukoil and Surgutneftegaz have not yet reported results, but chances are the situation will be pretty similar.

At the same time, Big Oil has been in bloom ever since OPEC struck that deal and prices jumped. Everyone in the select club reported profits that beat analyst expectations, despite a dire warning from Barclays before profit season began that the majors will disappoint.

The bank was markedly pessimistic on Exxon, predicting it would report EPS of US$0.79, below an analyst consensus estimate of US$0.89. In fact, Exxon reported EPS of US$0.95, with the total net result at US$4 billion, up from US$1.8 billion a year earlier.

BP did even better, tripling its net result to US$1.5 billion from US$500 million between March 2016 and March 2017. Cash flow also improved, from US$3 billion to US$4.4 billion.

Shell, one last Big Oil example, reported income of US$3.54 billion for the first quarter versus US$484 million for the year-ago period, with cash flow from operations skyrocketing to US$9.51 billion from just US$661 million a year earlier.

Clearly, the OPEC deal has been good for Big Oil, motivating higher production and boosting bottom lines. Rosneft, on the other hand, had to cut 70,000 bpd from its daily average in the first quarter to comply with the OPEC deal. However, oil is now back below US$50 a barrel, despite the deal, and there are voices questioning the point of an extension. Related: Is The U.S. Oil Patch A Value Trap?

Several OPEC officials have already signed up for the extension, including Saudi Arabia’s Khalid al-Falih, who two months ago said he would not support an extension as it would only help U.S. shale boomers. Russia’s Alexander Novak is also on board – there really is precious little else OPEC or Russia could do to support prices. The extension is all but official now, so the rest of the year will likely also be tough for Rosneft and its local sector players.

By Irina Slav for Oilprice.com

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  • Anders Sorensen on May 11 2017 said:
    This is really bad research, the sole reason Rosneft missed target is taxes, which have surged 83 pct. from same periode last year. Sure ExxonMobile also pays more in taxes, but that amount only surged 22,5 pct. Just to remind you, have Rosneft lowered their production? No. Have Exxonmobile? Yes,.

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