With the last of the financial statements from major producers out, it is clear that 2017 has been a much better year for the oil & gas industry, with profits for the fourth quarter and the full year on the upswing as the year-long gain in oil prices (thank you, OPEC) swelled revenue and profits. Most majors have echoed BP CEO Bob Dudley that ‘2017 was one of the strongest years in (BP’s) recent history’; yet, instead of boosting share prices, oil & gas stocks have seen a rout. Why?
The question is one of expectations versus reality. Within the cluster of five supermajors (including Total), only Shell, BP and Total managed to beat analyst expectations for Q417 results. Their American counterparts ExxonMobil and Chevron failed to meet forecasts. Despite a 750% y-o-y jump in Q417 net profits, Chevron’s figure came in just under predictions. However, ExxonMobil gave the biggest surprise, reporting Q417 profits that were 2% lower than Q416, the only red in a sea of black. Shell has now eclipsed ExxonMobil’s quarterly net profits for most of 2017, while BP has resumed share buybacks, a practice that remains suspended at ExxonMobil since 2016. Investors punished ExxonMobil for this, while concerns over crude prices losing steam pushed that stock price retreat across the industry.
Adding to this was a worldwide tumble across global financial markets, triggered by unexpected signs of inflation in the US that spooked investors into thinking that central banks might have to tighten policies more aggressively. The Dow Jones plunged 1000 points three times over a five-day period, with the malaise spreading to Europe and Asia. At time of writing, the share prices of the supermajors are some 5-15% lower from February 1. The losses have also extended to national oil companies (PetroChina shares are down 13% over the same period) and service firms (Schlumberger shares are down 12%), despite strong financial earnings reports.
There is reason to believe this is temporary. If 2017 was a good year for oil majors, 2018 promises to be even better. For ExxonMobil, its bumper discoveries in Guyana may start contributing to profits and production figures towards the end of the year, while Chevron’s Gorgon and Wheatstone LNG projects in Australia are finally off the ground. BP has seven major upstream projects coming up, while Shell seems finally at the end of its debt-cutting exercise to justify its purchase of the BG Group. Even technical service companies – which endured a bad 2016 and 2017 – are seeing their numbers tick up. Oil prices should stay around US$60/b, despite surging shale production. The current drag on share prices is only temporary; the fundamentals are enough to see a strong 2018 for oil & gas revenue and profits, which should be enough to push stock values up over the year.
Supermajor net profit results for Q417 (vs Q416)
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Headline crude prices for the week beginning 11 November 2019 – Brent: US$62/b; WTI: US$56/b
Headlines of the week
The year’s final upstream auctions were touted as a potential bonanza for Brazil, with pre-auction estimates suggesting that up to US$50 billion could be raised for some deliciously-promising blocks. The Financial Times expected it to be the ‘largest oil bidding round in history’. The previous auction – held in October – was a success, attracting attention from supermajors and new entrants, including Malaysia’s Petronas. Instead, the final two auctions in November were a complete flop, with only three of the nine major blocks awarded.
What happened? What happened to the appetite displayed by international players such as ExxonMobil, Shell, Chevron, Total and BP in October? The fields on offer are certainly tempting, located in the prolific pre-salt basin and including prized assets such as the Buzios, Itapu, Sepia and Atapu fields. Collectively, the fields could contain as much as 15 billion barrels of crude oil. Time-to-market is also shorter; much of the heavy work has already been done by Petrobras during the period where it was the only firm allowed to develop Brazil’s domestic pre-salt fields. But a series of corruption scandals and a new government has necessitated a widening of that ambition, by bringing in foreign expertise and, more crucially, foreign money. But the fields won’t come cheap. In addition to signing bonuses to be paid to the Brazilian state ranging from US$331 million to US$17 billion by field, compensation will need to be paid to Petrobras. The auction isn’t a traditional one, but a Transfer of Rights sale covering existing in-development and producing fields.
And therein lies the problem. The massive upfront cost of entry comes at a time when crude oil prices are moderating and the future outlook of the market is uncertain, with risks of trade wars, economic downturns and a move towards clean energy. The fact that the compensation to be paid to Petrobras would be negotiated post-auction was another blow, as was the fact that the auction revolved around competing on the level of profit oil offered to the Brazilian government. Prior to the auction itself, this arrangement was criticised as overtly complicated and ‘awful’, with Petrobras still retaining the right of first refusal to operate any pre-salt fields A simple concession model was suggested as a better alternative, and the stunning rebuke by international oil firms at the auction is testament to that. The message is clear. If Brazil wants to open up for business, it needs to leave behind its legacy of nationalisation and protectionism centring around Petrobras. In an ironic twist, the only fields that were awarded went to Petrobras-led consortiums – essentially keeping it in the family.
There were signs that it was going to end up this way. ExxonMobil – so enthusiastic in the October auction – pulled out of partnering with Petrobras for Buzios, balking at the high price tag despite the field currently producing at 400,000 b/d. But the full-scale of the reticence revealed flaws in Brazil’s plans, with state officials admitting to being ‘stunned’ by the lack of participation. Comments seem to suggest that Brazil will now re-assess how it will offer the fields when they go up for sale again next year, promising to take into account the reasons that scared international majors off in the first place. Some US$17 billion was raised through the two days of auction – not an insignificant amount but a far cry from the US$50 billion expected. The oil is there. Enough oil to vault Brazil’s production from 3 mmb/d to 7 mmb/d by 2030. All Brazil needs to do now is create a better offer to tempt the interested parties.
Results of Brazil’s November upstream auctions:
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