LONDON – Oil majors are expected to post the worst set of earnings since the onset of the sector’s downturn, with writedowns likely to dominate headlines as companies respond to a further drop in the price of crude in the third quarter.
Between Oct. 26 and Nov. 12 the world’s top listed oil and gas producers will reveal just how badly they’ve been hurt by the 17 percent quarter-on-quarter fall in prices.
Lower fuel costs should provide a little upside for their refining businesses, but the overall pain is expected to be acute.
“Earnings are likely to be the lowest of this downturn,” Morgan Stanley analysts said, forecasting an average 60 percent year-on-year fall in net third-quarter income among Europe’s biggest integrated oil companies.
The worst downturn in decades, driven by a global oil supply glut, has prompted the majors to make drastic cuts to investment budgets, mainly aimed at costly exploration activities.
The most high-profile victim has been Shell’s controversial drilling program in the Alaskan Arctic. The company announced its withdrawal from the Chukchi Sea last month, resulting in a potential $4.1 billion write-off.
The huge impairment comes as investors begin questioning whether Shell is overpaying on its $70 billion acquisition of smaller rival BG Group.
The fall in energy prices has heaped pressure on Shell to justify the deal on which it is relying for future growth in the LNG market and offshore frontiers such as Brazil.
Analysts at Nomura say that further impairments across the industry are likely, estimating that 20 percent of upstream investments could be at risk if companies lower their oil price assumptions for the coming years to about $70 a barrel.
“Impairments will highlight the level of value destruction the industry has overseen as it has chased growth over returns in the past 10 years,” they said in a recent research note.
The price of Brent crude averaged $51.40 a barrel in the third quarter, compared with $105.60 a year earlier.
CLARITY ON BP
BP’s Macondo oil spill settlement, which the company has estimated will cost about $54 billion, finally gives investors clarity on the size of the bill. BP will need to pay off its bill for the next 18 years, but analysts at UBS said that the financial predictability will allow BP to go on the hunt for mergers and acquisitions.
Downstream results are expected to again help majors bridge troubled times and could, as in previous quarters, take the market by surprise.
Europe’s largest refiner Total is one of the biggest beneficiaries of weak oil prices.
The company said last week that its European refining margins indicator rose to $54.80 a tonne in the third quarter, its highest in at least 12 years.
The French company is also progressing well with its divestment program, though it has ruled out the possibility of exceeding the target of $10 billion of disposals by 2017.
Sector analysts’ investment tips vary widely, but Total remains one of the top picks, with Statoil and Shell also among the companies that currently attract most “buy” recommendations.
Shareholder dividends are expected to remain sacrosanct.
So far only Eni has cut its payout in response to weak oil prices, though others have weighted their payouts towards scrip dividend programs, meaning that shareholders gain equity instead of cash.
“Covering the dividend is the cornerstone of everything we are doing,” Total’s Chief Financial Officer Patrick de la Chevardiere said at a recent press event in London.
Other companies reporting include ExxonMobil, ConocoPhillips, Chevron, OMV and Repsol.
(Additional reporting by Amanda Cooper in London and Soumithri Mamidipudi in Bengaluru; Editing by David Goodman)
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