As the Covid-19 slowly but surely eases, the oil and gas industry has released its financial results for Q1 2020. And, as expected, the results are rather grim.
The year 2020 started off on a relatively decent note, with oil prices in the mid-US$60/b range. It wasn’t record-breaking, but it was sustainable, with hope that the supply glut anticipated for the year would gradually ease. At US$60/b, there’s profit to be made, even for expensive projects aimed at tapping into risky-resources, from Canada’s oil sands complex in Alberta to Total’s difficult deepwater Brulpadda project in the turbulent seas off South Africa. It is enough for the US shale patch to continue drilling to save its life, and it more than covers the estimated production costs in Saudi Arabia that is thought to be near US$10/b.
What a change a few months have made. The rumblings of the Covid-19 outbreak moved from isolated in China to a full-blown global pandemic, causing a swift but sure attack on energy demand. Demand reacts to supply, but supply in the oil world is slow to react. Very slow to react. Then, as country after country initiated lockdowns, the two titans of the OPEC+ pact decided to initiate something else: an oil price war following a disagreement over extending and deepening the club’s supply deal. Oil prices halved to US$30/b. That lasted for over a month, resolved only in April, by which time, untold damage had been done and US oil prices briefly, fell into negative territory. The global Brent benchmark fell to US$15/b.
The cut-off for financial results was March 31, before the worst of the price route occurred. But it was enough to cause alarming results for the world’s largest publicly-traded oil companies. Years of fiscal restraint had slowly been giving way to ambitious spending. That has been cut short, but the previous cost-cutting measures did put the supermajors in a better position to weather a storm. The only question now is: how long will this storm last?
As it were, the Q1 2020 financial results from the five oil supermajors paint a mixed picture. Traditionally, BP and Shell are the first to release. First to bear the bad news was UK’s BP, which declared a net profit of US$800 million, down from US$2.4 billion reported in Q1 2019. It was, according to CEO Bernard Looney, ‘a good quarter but, undoubtedly, a very brutal environment’, but BP still declared a (reduced) dividend for its shareholders. Reducing dividends were a common denominator across the board in the industry, with Norway’s Equinor being the first to announce and Shell following BP by cutting its shareholder rewards for the first time since World War II and suspending its share buyback programme. Shell’s results did manage to meet market expectations, though, with net profit down by almost half to some US$2.9 billion. Total, the last of the European supermajors to report, also had similar results, net profits sliding down to US$1.8 billion, beating consensus forecasts.
It was in the US, though, that the worst financial results were reported. This was already expected, with service giants Schlumberger and Halliburton reporting massive impairments on the destruction of the US shale patch; and of the supermajors, none bet more heavily on the golden egg of shale than Chevron and ExxonMobil. Against that backdrop, Chevron actually performed very well. Having lagged behind its rivals since 2017, Chevron actually reported a 14% rise in profits to US$3.6 billion despite a 13% fall in revenue. But that was largely because Chevron had already taken a US$10 billion impairment on Permian shale assets in Q4 2020, and must be relieved that its attempted takeover of Anadarko last year was sniped by Occidental Petroleum. In contrast, ExxonMobil took it on its chin in Q1 2020, declaring a US$2.9 billion impairment on the value of its inventory and assets due to the crude plunge, leading to a quarterly net loss of US$610 million.
Across the board, dividends were slashed, as was capital expenditure, which all supermajors slashing their upstream budgets by an average of 30% for 2020 and 2021. Most are predicting an annual loss of some 16-20 mmb/d of oil demand for the year, coinciding with the higher end of predictions, reflecting a mood that a recovery will come soon. But before that recovery can come, the entire industry still has to weather the current storm. If the conditions in Q1 2020 were bad, then the conditions in Q2 2020 will be worst. Grim as they as, the Q1 2020 financial results are no anomaly, but a sign of worst things to come. The only hope that the industry is clinging on to is that the storm will pass soon. That can’t come soon enough.
Q1 2020 Supermajor Results:
- ExxonMobil: Revenue (US$56.1 billion, down 11.1% y-o-y); Net Profit (-US$610 million, down 120% y-o-y)
- Chevron: Revenue (US$29.7 billion, down 13.1% y-o-y); Net Profit (US$3.6 billion, up 13.8% y-o-y)
- Shell: Revenue (US$60 billion, down 28.3% y-o-y); Net Profit (US$2.9 billion, down 46% y-o-y)
- BP: Revenue (US$59.7 billion, down 10% y-o-y); Net Profit (US$800 million, down 67% y-o-y)
- Total: Revenue (US$43.8 billion, down 14.4% y-o-y); Net Profit (US$1.8 billion, down 35% y-o-y)
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