The first quarter of 2018 has proven to be a continuation of an upswing that settled in over 2017, at least according to the financial results of the supermajors. Aggressive cost-cutting from the past paired with a consistent rise in crude prices over the first quarter has contributed to revenue and net profit gains across the board.
In London, BP announced its highest profits in years, with net profits jumping to US$2.59 billion, even as the company continues to be burdened by payments over the Deepwater Horizon catastrophe from 2010. But investors still reacted well to the numbers, with BP’s share price reaching its highest levels since 2010 and it named a new chairman – Statoil’s Helge Lund – who will be tasked to continue this streak of growth. Fellow European supermajor Total continued its winning streak, beating expectations in both revenue and net profits, as did Shell, where net profits jumped 42% to US$5.32 billion. In fact, Shell has beaten the industry’s behemoth – ExxonMobil – in net profits for the past three quarters. ExxonMobil missed analyst expectations narrowly once again in the first quarter, although its US$4.7 billion net profit is nothing to be sniffed at. Yet, ExxonMobil shares remain on the downswing, with industry perception that new CEO Darren Woods have overseen a recovery that remains weaker than Shell’s and even Chevron’s.
The rise continues across the rest of the industry. Profits at Schlumberger are up 88%, promising a recovery in the service sector. Even Pemex, that beleaguered Mexican state oil firm, reported a 29% jump in net profits to US$6 billion. The impetus for the improvement has been rising crude prices, which averaged US$63/b over Q118 compared to US$53/b over Q117. In most cases, the magnitude of net profit increase has been matched by similar growth in revenue – which is a sign that the crude price rally is behind much of the profit gains. With crude prices trending even higher in Q218, industry financials are due for an even better quarter, though it is still too early to declare that the good times have come back for good.
Still, with numbers firmly in the black, analysts and investors are turning their eye towards more granular data to gauge performance. In this case, cash flow. Hoping that the increased profits will be passed on to shareholders through share buybacks, investors have rewarded firms that are embarking on buybacks – BP, Total – and punished those that have shied away. Shell’s share prices were hammered after it announced it was not proceeding with a US$25 billion stock repurchase program yet, and ExxonMobil still has no intention of returning to generous buybacks as of yet. The latter two argue that more work needs to be done to fortify operational foundations, but it seems that investors are getting impatient and want to be rewarded for their patience since 2015.
From a long term investment perspective, Reuters reports that “ investors remain wary that oil demand may peak due to eventual mass adoption of battery-powered cars and more curbs on fossil fuel emissions by industry to meet environmental targets. Some are hedging their bets, buying shares in battery companies and chipmakers involved in making electric cars while lessening their exposure to pure oil plays. But the shift to cleaner energy doesn’t necessarily mean investors are dumping the oil majors. Many are sticking with them but favouring companies which put more emphasis on renewables”. This seems to indicate that investors are still keen a growth story, that is sustainable from a long term perspective.
Something interesting to share?
Join NrgEdge and create your own NrgBuzz today
The Permian is in desperate need of pipelines. That much is true. There is so much shale liquids sloshing underneath the Permian formation in Texas and New Mexico, that even though it has already upended global crude market and turned the USA into the world’s largest crude producer, there is still so much of it trapped inland, unable to make the 800km journey to the Gulf Coast that would take them to the big wider world.
The stakes are high. Even though the US is poised to reach some 12 mmb/d of crude oil production next year – more than half of that coming from shale oil formations – it could be producing a lot more. This has already caused the Brent-WTI spread to widen to a constant US$10/b since mid-2018 – when the Permian’s pipeline bottlenecks first became critical – from an average of US$4/b prior to that. It is even more dramatic in the Permian itself, where crude is selling at a US$10-16/b discount to Houston WTI, with trends pointing to the spread going as wide as US$20/b soon. Estimates suggest that a record 3,722 wells were drilled in the Permian this year but never opened because the oil could not be brought to market. This is part of the reason why the US active rig count hasn’t increased as much as would have been expected when crude prices were trending towards US$80/b – there’s no point in drilling if you can’t sell.
Assistance is on the way. Between now and 2020, estimates suggest that some 2.6 mmb/d of pipeline capacity across several projects will come onstream, with an additional 1 mmb/d in the planning stages. Add this to the existing 3.1 mmb/d of takeaway capacity (and 300,000 b/d of local refining) and Permian shale oil output currently dammed away by a wall of fixed capacity could double in size when freed to make it to market.
And more pipelines keep getting announced. In the last two weeks, Jupiter Energy Group announced a 90-day open season seeking binding commitments for a planned 1 mmb/d, 1050km long Jupiter Pipeline – which could connect the Permian to all three of Texas’ deepwater ports, Houston, Corpus Christi and Brownsville. Plains All American is launching its 500,000 b/d Sunrise Pipeline, connecting the Permian to Cushing, Oklahoma. Wolf Midstream has also launched an open season, seeking interest for its 120,000 b/d Red Wolf Crude Connector branch, connecting to its existing terminal and infrastructure in Colorado City.
Current estimates suggest that Permian output numbered around 3.5 mmb/d in October. At maximum capacity, that’s still about 100,000 b/d of shale oil trapped inland. As planned pipelines come online over the next two years, that trickle could turn into a flood. Consider this. Even at the current maxing out of Permian infrastructure, the US is already on the cusp on 12 mmb/d crude production. By 2021, it could go as high as 15 mmb/d – crude prices, permitting, of course.
As recently reported in the WSJ; “For years, the companies behind the U.S. oil-and-gas boom, including Noble Energy Inc. and Whiting Petroleum Corp. have promised shareholders they have thousands of prospective wells they can drill profitably even at $40 a barrel. Some have even said they can generate returns on investment of 30%. But most shale drillers haven’t made much, if any, money at those prices. From 2012 to 2017, the 30 biggest shale producers lost more than $50 billion. Last year, when oil prices averaged about $50 a barrel, the group as a whole was barely in the black, with profits of about $1.7 billion, or roughly 1.3% of revenue, according to FactSet.”
The immense growth experienced in the Permian has consequences for the entire oil supply chain, from refining balances – shale oil is more suitable for lighter ends like gasoline, but the world is heading for a gasoline glut and is more interested in cracking gasoil for the IMO’s strict marine fuels sulphur levels coming up in 2020 – to geopolitics, by diminishing OPEC’s power and particularly Saudi Arabia’s role as a swing producer. For now, the walls keeping a Permian flood in are still standing. In two years, they won’t, with new pipeline infrastructure in place. And so the oil world has two years to prepare for the coming tsunami, but only if crude prices stay on course.
Recent Announced Permian Pipeline Projects
Headline crude prices for the week beginning 3 December 2018 – Brent: US$61/b; WTI: US$52/b
Headlines of the week
The engine oil market has grown up around 10 to 12% in the last three years because of various reasons, mostly because of the rise of automobiles.
According to the Bangladesh Road Transport Authority (BRTA), the number of registered petrol and diesel-powered vehicles is 3,663,189 units.
The number of automotive vehicles has increased by 2.5 times in the last eight years.
The demand for engine oils will rise keeping pace with the increasing automotive vehicles, with an expected 3% yearly growths.
Mostly, for this reason, the annual lubricant consumption raised over 14% growth for the last four years. Now its current demand is around 160 million tonnes.
The overall lubricants demand has increased also for the growth of the power sector, which has created a special market for industrial lubricants oil.
The lubricants oil market size for industries has doubled in the last five years due to the establishment of a number of power plants across the country.
The demand for industrial oil will continue to rise at least for the next 15 years, as the quick rental power plants need a huge quantity of lube oil to run.
The industries account for 30% of the total lubricant consumption; however, it is expected to take over 35% of the overall demand in the next 10 years.
Mobil is the market leader with 27% market share; however, market insiders say that around 70% market shares belong to various brands altogether, which is still undefined.
It is already flooded with many global and local brands.