Pandemic Pain Persists for Big Oil Companies -- Update

By Christopher M. Matthews and Sarah McFarlane 

Major oil companies signaled they remain under extreme financial pressure and oil prices slid Thursday as demand for fossil fuels rebounds slowly after being crushed by the coronavirus pandemic.

Despite a modest economic recovery, oil-and-gas companies are being hammered by a sustained drop in consumption of gasoline and jet fuel as millions of people work from home and avoid driving and flying. That is combining with longer-term concerns about future competition from renewable energy and electric vehicles to drag down the value of many oil and gas companies to decade lows.

A stock index of U.S. oil-and-gas companies is down about 55% in 2020 even as the overall stock market is up slightly. On Thursday, the share prices of Royal Dutch Shell PLC and BP hit fresh 25-year-lows, and Exxon Mobil Corp. and Chevron Corp. also dropped. U.S. crude prices fell to around $38 a barrel Thursday afternoon, levels at which most companies cannot produce profitably.

Exxon and Shell said this week that key parts of their business continued to struggle through the summer and early fall, which will weigh down the third quarter results they are set to report in coming weeks.

Exxon warned Thursday that it expected earnings from its oil production unit to improve by as much as $1.8 billion from the second quarter, but that its natural gas sales and its refining business could lose more money. Analysts forecast a quarterly loss of more than $500 million when the company reports on Oct. 30, which would mark its third consecutive quarter in the red.

Shell said Wednesday it would cut up to 9,000 jobs in a broad restructuring, and warned it was also poised to report poor third-quarter earnings, including a second consecutive quarterly loss in its oil-and-gas production business. The planned job cuts follow similar moves at peers including BP PLC and Chevron Corp. to rein in costs amid the pandemic. Exxon has said it is conducting a workforce review, which might lead to layoffs.

This lousy oil-and-gas earnings this year have turned off many investors, who remain unenthusiastic about the sector despite a modest rebound in crude prices from the historic lows of this spring.

Smaller, independent players continue to face a struggle for survival. On Wednesday, Houston-based shale driller Oasis Petroleum Inc. filed for chapter 11, joining at least three dozen other North American oil-and-gas producers in seeking bankruptcy protection this year, according to law firm Haynes and Boone LLP.

"Due to historically low global energy demand and commodity prices, we determined that it is best for Oasis Petroleum to take decisive action to strengthen our liquidity and overcome the headwinds now challenging both our company and industry," Oasis Chief Executive Thomas Nusz said in a statement.

As the number of global Covid-19 infections continue to rise, the return of restrictions that could reduce the number of cars on the road and overall economic activity is leading to market pessimism that oil demand will take a long time to recover. Russia's energy ministry has said it doesn't expect a fast recovery, while Vitol Group, the world's biggest independent oil trader, said earlier this week it doesn't expect oil prices to rise until 2021.

"The demand side of the equation will continue to be under threat during the fourth quarter of the year, with Covid-19 cases rising at an alarming rate, notably in Europe, which has already imposed new restrictions to curve down the number of cases," said Paola Rodriguez-Masiu, an analyst at Rystad Energy.

Rystad expects around 150 additional North American oil and gas producers to file for bankruptcy by the end of 2022 if crude prices remain around $40 a barrel.

The U.S. is now generating fewer than 11 million barrels of oil daily, down from around 13 million barrels a day early this year, Energy Information Administration data show. Two-thirds of oil-and-gas executives who responded to a recent survey by the Federal Reserve Bank of Dallas said they think U.S. oil production will never fully recover.

Meanwhile, domestic consumption of gasoline and distillates including diesel remains depressed, down roughly 9% from a year ago, according to the EIA. That is weighing on refiners such as Marathon Petroleum Corp., which said Wednesday that it was laying off some 2,000 employees. Many of those cuts are tied to the company's recent decision to keep two of its refineries idled indefinitely. In all, Marathon Petroleum is cutting around 12% of its jobs, excluding roles at its Speedway gas station chain, which 7-Eleven Inc. has agreed to buy.

For major oil companies with large liquefied-natural-gas businesses, analysts expect weaker margins. LNG is sold via long-term contracts where prices are often linked to oil with a time lag of three to six months. That means the fall in oil prices earlier this year reached LNG only during the third quarter.

"The macro environment certainly was very difficult, and profitability will have deteriorated in refining and LNG," said Irene Himona, an analyst at Société Générale who expects another tough quarter for major oil companies.

Longer-term doubts are also clouding the industry's outlook. BP said in September that global oil demand could have already peaked and that it would potentially never recover to pre-pandemic levels.

BP, Shell and other major European fossil-fuel companies have said they plan to invest heavily in renewable energy over the next decade. Exxon, Chevron and most U.S. shale companies remain committed to oil and gas.

Dan Pickering, chief investment officer of Pickering Energy Partners LP, said that the industry has lost some investors over concerns about the energy transition, even though the world will need large amounts of oil and gas for decades to come.

"It has been a slow-growth business for a long time. It may turn into a no-growth to a declining business for a long time," Mr. Pickering said.

Still, some executives are hopeful that the reduced investment in oil and gas production this year will result in higher oil prices in future. Total SA has drawn up a 10-year investment plan based on a $50 a barrel price for the Brent crude oil benchmark. On Thursday, Brent oil traded for around $41 a barrel.

"We are at $40 in the middle of a huge crisis where we have seen a big oversupply and a huge lack of demand," Total Chief Executive Patrick Pouyanne told investors this week. "I am sure that in two to three years we will see higher prices and forget like we have done in the last five years," he added.

Rebecca Elliott contributed to this article.

Write to Christopher M. Matthews at [e-mail] and Sarah McFarlane at [e-mail]

(END) Dow Jones Newswires

October 01, 2020 14:59 ET (18:59 GMT)

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