Crude price, some results & the odd downgrade

We are well into the quarterly results season with oil and gas companies counting costs of the recent oil price slump on their profit margins among other things. The price itself is a good starting point. 

The Oilholic’s latest 5-day price assessment saw Brent nearly flat above US$86 per barrel at the conclusion of the weekly cycle using each Friday this month as a cut-off point (see left, click on graph to enlarge). 

Concurrently, the WTI stayed above $81 per barrel. It is worth observing the level of both futures benchmarks in tandem with how the OPEC basket of crude oils fared over the period. Discounting kicked-off by OPEC heavyweight Saudi Arabia earlier in the month, saw Iran and Kuwait follow suit. Subsequently, the OPEC basket shed over $6 between October 10 and October 24. If Saudi motives for acting as they are at the moment pique your interest, then here is one’s take in a Forbes article. Simply put, it’s an instinct called self-preservation! 

Recent trading sessions seem to indicate that the price is stabilising where it is rather than climbing back to previous levels. As the Western Hemisphere winter approaches, the December ICE Brent contract is likely to finish higher, and first contract for 2015 will take the cue from it. This year's average price might well be above or just around $100, but betting on a return to three figures early on into next year seems unwise for the moment.

Reverting back to corporate performance, the majors have started admitting the impact of lower oil prices. However, some are facing quite a unique set of circumstances to exasperate negative effects of oil price fluctuations.

For instance, Total tragically and unexpectedly lost its CEO Christophe de Margerie in plane crash last week. BP now has Russian operational woes to add to the ongoing legal and financial fallout of the Gulf of Mexico oil spill. Meanwhile, BG Group has faced persistent operational problems in Egypt but is counting on the appointment of Statoil’s boss as its CEO to turn things around.

On a related note, oilfield services (OFS) companies are putting on a bullish face. The three majors – Baker Hughes, Halliburton and Schlumberger – have all issued upbeat forecasts for 2015, predicated on continued investment by clients including National Oil Companies (NOCs).

In a way it makes sense as drilling projects are about the long-term not the here and now. The only caveat is, falling oil prices postpone (if not terminate) the embarkation of exploration forays into unconventional plays. So while the order books of the trio maybe sound, smaller OFS firms have a lot of strategic thinking to do.

Nonetheless, we ought to pay heed to what the big three are saying, notes Neill Morton, analyst at Investec. “They have unparalleled global operations and unrivalled technological prowess. If nothing else, they dwarf their European peers in terms of market value. As a result, they have crucial insight into industry activity levels. They are the ‘canaries in the coal mine’ for the entire industry. And what they say is worth noting.”

Fair enough, as the three and Schlumberger, in particular, view the supply and demand situation as “relatively well balanced”. The Oilholic couldn’t agree more, hence the current correction in oil prices! The ratings agencies have been busy too over the corporate results season, largely rating and berating companies from sanctions hit Russia.

On October 21, Moody's issued negative outlooks and selected ratings downgrade for several Russian oil, gas and utility infrastructure companies. These include Transneft and Atomenergoprom, who were downgraded to Baa2 from Baa1 and to Baa3 from Baa2 respectively. The agency also downgraded the senior unsecured rating of the outstanding $1.05 billion loan participation notes issued by TransCapitalInvest Limited, Transneft's special purpose vehicle, to Baa2 from Baa1. All were given a negative outlook.

Additionally, Moody's changed the outlooks to negative from stable and affirmed the corporate family ratings and probability of default ratings of RusHydro and Inter RAO Rosseti at Ba1 CFR and Ba1-PD PDR, and RusHydro's senior unsecured rating of its Rouble 20 billion ($500 million) loan participation notes at Ba1. Outlook for Lukoil was also changed to negative from stable.

On October 22, Moody's outlooks for Tatneft and Svyazinvestneftekhim (SINEK) were changed to negative. The actions followed weakening of Russia's credit profile, as reflected by Moody's downgrade of the country’s government bond rating to Baa2 from Baa1 a few days earlier on October 17.

Meanwhile, Fitch Ratings said the liquidity and cash flow of Gazprom (which it rates at BBB/Negative) remains strong. The company’s liquidity at end-June 2014 was a record RUB969 billion, including RUB26 billion in short-term investments. Gazprom also reported strong positive free cash flows over this period.

“We view the record cash pile as a response to the US and EU sanctions announced in March 2014, which have effectively kept Gazprom, a key Russian corporate borrower, away from the international debt capital markets since the spring. We also note that Gazprom currently has arguably the best access to available sources of funding among Russian corporate,” Fitch said in a note to subscribers.

By mid-2015, Gazprom needs to repay or refinance RUB295 billion and then another RUB264 billion by mid-2016. Its subsidiary Gazprom Neft (rated BBB/Negative by Fitch) is prohibited from raising new equity or debt in the West owing to US and EU sanctions, in addition to obtaining any services or equipment that relate to exploration and production from the Arctic shelf or shale oil deposits.

On the other hand, a recent long term deal with the Chinese should keep it going. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma, October, 2014. Graph: Brent, WTI and OPEC Basket prices for October 2014 © Gaurav Sharma, October, 2014.

Talking Crude: Of Profits, Tax rebates & Asset Sales

Last week was an eventful one in crude terms. Well it’d have to be if Shell and Exxon Mobil declare bumper profits. Both saw their quarterly profits almost double. Beginning with Shell, the Anglo-Dutch firm reported profits of US$4.5 billion on a current cost (of supply) basis, up from US$2.3 billion noted over the corresponding quarter last year.

Excluding one-off items, Shell's profit was $4.2 billion, compared with $3.1 billion last year. Unlike BP, Shell said it would pay a second quarter dividend of $0.42 per share. The oil giant's restructuring plans also appear to be bearing fruit achieving cost savings of $3.5 billion, beating the stated corporate savings target by about 15% and some six months ahead of schedule.

Furthermore, it is thought that as a result of the restructuring, 7,000 employees would leave Shell nearly 18 months ahead of schedule. It also said it expected to sell $7-$8 billion of assets over 2010-11. Concurrently, oil giant Exxon Mobil reported quarterly profits of $7.6 billion, well above the $4.1 billion it posted over the corresponding quarter last year. Revenue for the quarter rose 23% in year over year terms on annualised basis from $72.5 billion to $92.5 billion.

Meanwhile, rival BP reported a record $17 billion second quarter loss which the market half expected. The figure included funds to the tune of $32 billion set aside to cover the costs of the oil spill in the Gulf of Mexico.

Sticking with BP, it has emerged that the beleaguered oil giant included a tax credit claim of almost $10 billion in its Q2 results as it seeks to take the edge off the impact of the Gulf of Mexico oil spill on its corporate finances. Its income statement for the second quarter carries a pre-tax charge of $32.2 billion related to the oil spill and a tax credit of $9.79 billion.

Under domestic tax laws in the US, BP is entitled to deduct a proportion of its losses against US tax. The issue is likely to turn political – especially in an election year, when much more has been made out of far less. However, legally the US government can do precious little to prevent BP from claiming the tax credit.

Crude asset sales seem to be the order of the day. Following on from BP’s sale of assets and Shell’s announcement that it will sell too, news emerged that the Russian government also wants to join the party.

It plans to sell $29 billion worth of assets (not all which are energy sector assets) on the open markets. In the absence of official confirmation, local media speculation suggests minor stakes in Rosneft and Transneft may be put up for sale.

However, speaking to reporters in Moscow on July 29th, the country’s Finance Minister Alexei Kudrin said, "We will sell significant stakes in state companies on the market. We plan to keep controlling stakes. Assets will be valued publicly, in line with market prices and tenders will be open. We are fully ruling out a situation when somebody sells something to someone at an artificially low price."

According to communiqués, the Russian government wanted to rake in $10 billion next year from asset sales. It has also approved a decision to increase mineral extraction taxes on gas producers by 61% from 2011.

Finally from a macro strandpoint, market consensus and comments from BP, Shell and Exxon officials seem to indicate that the top bosses of all three see mixed signals in the global economy. While their earnings figures, excluding BP for obvious reasons, have improved markedly from the quarterly lows of 2009, the overall industry outlook remains uncertain.

© Gaurav Sharma 2010. Photo courtesy © Shell