The increasingly desperate situation in oil markets has forced down big names in energy to 16-year lows as crude prices tumble into the lower $30 per barrel range following U.S. President Donald Trump’s announcement to ban all travel from Europe into the U.S.
The S&P 500 Energy Index, which boasts big names such as Apache, Baker Hughes, Devon Energy, Marathon Oil, Valero and Schlumberger has fallen 45 percent in the last 30-days, as a result of the coronavirus pandemic and the oil price war between Saudi Arabia and Russia.
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S&P 500 Energy Sector (^GSPE) 1-month chart – source: Yahoo Finance
As a result, several U.S. oil firms including Apache and Devon Energy have started to cut capex and production.
Apache Corporation said on Thursday it was slashing its 2020 capital investment plan to $1.0 billion-$1.2 billion from a previous range of $1.6 billion-$1.9 billion. Apache will also stop pumping oil in the Permian in the coming weeks to limit “exposure to short-cycle oil projects.” The company is also cutting dividend by 90 percent.
Devon Energy also announced on Thursday that it would cut spending by 30 percent compared to its previous 2020 capital plan.
These capital expenditure cuts may just be the beginning as the oil & gas industry is bracing for a tough remainder of the year. While the U.S. shale patch is in for a beating, oil majors aren’t expected to do much better.
Plans to boost dividends and increase shareholder payouts in the first half of the 2020s are about to be thrown out of the window as barely any oil firm is able to generate sufficient cash flow and payout a dividend with oil below $40 per barrel. The real question here is, how high will oil majors let their debt run before deciding to actually cut back on dividend payments.
On Thursday afternoon, the U.S. Federal Reserve pledged to inject $1.5 Trillion into the U.S. markets to cull the growing panic, and while this boosted markets and oil prices temporarily, indices and oil prices continued to fall toward the end of today’s trading session.
Oil majors continued to sell off in the meantime, with ExxonMobil down 10.20 percent at $37.70, Royal Dutch Shell down 15.03 percent at $29.30, BP down 12.67 percent at $21.53, Chevron down by 9.37 percent at $75.25, and French oil major Total down by 15.86 percent at $29.04 at 2.45 PM Central Time.
The oil giants are facing a perfect storm as crashing oil prices are expected to weigh on Q1/Q2 upstream results while lagging (jet)fuel sales are impacting downstream earnings.
Is it all bad for big oil then? The silver lining in the next earnings reports could come from the trading floor, where the oil-trading wing of oil majors is set to make a killing on contango-style trades.
By Tom Kool of Oilprice.com
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