Pandemic crisis: Low oil price, falling demand push oil & gas industry to the brink

Earlier this week, oil prices plunged to the lowest level in nearly two decades amid falling demand as most countries went into lockdown in the wake of the COVID-19 outbreak. However, prices climbed about 30% on Thursday following reports of Saudi and Russia agreeing to slash supply.

The Price War

Of late, the focus has been on the price war between Saudi Arabia, the largest oil producer, and Russia. The latest development is a social media statement by President Donald Trump, saying he got an assurance from the Saudi leadership that the country would work with Russia to reduce production. Soon after the Twitter message, oil price bounced back sharply to about $25 per barrel.

Just spoke to my friend MBS (Crown Prince) of Saudi Arabia, who spoke with President Putin of Russia, & I expect & hope that they will be cutting back approximately 10 Million Barrels, and maybe substantially more which, if it happens, will be GREAT for the oil & gas industry!

— Donald J. Trump (@realDonaldTrump) April 2, 2020

There have been concerns that the race would eventually put US shale producers in trouble as both Saudi and Russia remained adamant on their stance until recently. According to media reports, Saudi is calling for an OPEC meeting to discuss the issue, after being pressured by the US.

An earlier meeting between Russia, Saudi and other leading oil producing countries had failed to reach a consensus on reducing production capacity, in order to arrest the oil price free-fall. An agreement reached between OPEC and its allies on production cut had expired on March 31.

Most US companies reduced capacity considerably in recent weeks, while some closed operations to deal with the surplus. While the future of the already-stressed energy industry remains unpredictable, it is certain that the epidemic-induced uncertainty will linger for quite some time.

Cost Reduction

ExxonMobil Corp. (NYSE: XOM), the largest oil producer in the region, has embarked on a cost-reduction program with focus on slashing capital/operating expenses considerably, in response to the faltering crude prices and deepening macroeconomic crisis. However, the company expects its past experience in operating in low-price environments to help tide over the crisis.

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ExxonMobil’s CEO Darren Woods said, “We are confident that we will manage through these challenging times by taking deliberate action to keep our people safe, our environment protected and our company strong.”

The initiatives assume significance considering the weakness in operations in the final months of fiscal 2019, when strong earnings growth in the upstream segment was more than offset by a sharp decline in the downstream business. Adding to the pressure on margins, the chemicals division slipped to a loss.

Balanced Stance

Chevron Corporation (NYSE: CVX), another leading oil producer which has significant presence in the resource-rich Permian basin, said it would continue meeting the market’s energy requirements while following the social distancing guidelines. At the fourth-quarter conference call, CEO Michael Wirth reaffirmed his unique “strategy to win in any environment” – superior portfolio, resilience to price downside and capital discipline.

However, the widening demand-supply imbalance is bound to have a negative impact on the company’s cash flows in the foreseeable future. Nevertheless, Chevron’s strong fundamentals and scale of operations across markets give it an edge over others when it comes to tackling the situation.

Recently, the management announced a 20% cut in this year’s capital spending, mainly in response to the weakness in the natural gas and LNG segments, which should help the company maintain liquidity in these times of difficulty. It also suspended the share repurchase program. Once the market returns to normal, the energy giant will be able to cash in on its dominance in the Permian basin.

Chevron ended fiscal 2019 on a not-so-impressive note, reporting a double-digit drop in fourth-quarter revenues. Hurt by the broad-based slump both in the upstream and downstream segments, the company slipped to a net loss. However, the bottom-line came in above the consensus forecast.

Beating the odds

Meanwhile, Texas-based ConocoPhillips (NYSE: COP) is betting on its strong balance sheet and diverse portfolio to beat the demand crunch and stress on liquidity. Like its peers, the company is imposing a 10% cut in capital expenditure in the current fiscal year, with focus on reducing development activities in key areas including Alaska and Lower 48. It has also been decided to cut the share repurchase program by a third, starting the next quarter.

“Today’s circumstances require action and we believe we’re taking the right steps at the right time. Current conditions represent a significant challenge for our industry overall, but we remain focused on creating long-term value, especially through cycles,” said CEO Ryan Lance in a statement issued earlier this month. In the most recent quarter, ConocoPhillips witnessed slowdown in production across the board, which weighed on the company’s earnings and top-line performance.

Things could get worse for energy companies in the coming months, with some experts predicting a further decline in crude prices due to the ongoing uncertainty and its impact on economic activity

While discussing the 2020 production outlook at the earnings call in early February, Lance took a cautious stance citing the emerging COVID-19 scenario, which was limited to China then.

Shale Prowess

EOG Resources (NYSE: EOG) had a relatively better show in the December-quarter, probably because of its increased focus on shale gas exploration. Earnings increased and topped the Street view, despite a decline in revenues. Having slashed its 2020 capital plan by 30%, the company currently expects full-year crude oil production volumes to be flat.

To an analyst’s question on the potential impact of the epidemic on the company, at the fourth-quarter conference call, CEO William Thomas said, “We got a great balance sheet and we are committed to that and that’s certainly been a strength of EOG for years and years and years. And so, that puts us in a great position. And then, we’re very flexible.” It is true that the market mayhem will not spare EOG Resources in the near term, but the company has what it takes to bounce back when oil prices return to sustainable levels.

Looming Trouble 

Things could get worse for energy companies in the coming months, with some experts predicting a further decline in crude prices due to the ongoing uncertainty and its impact on economic activity. At the current prices, it would not be viable for companies to continue production.

Most players have either reduced or withheld their guidance for the current quarter and full fiscal year. Also, with several oil rigs coming to a grinding halt, the energy sector might witness large-scale layoffs in the coming weeks.