The oil majors are set to unveil their second-quarter earnings in the coming days, and analysts expect the figures to be pretty rough. Despite their size, the integrated oil majors are slated to post huge losses. The problem is that there is almost nowhere to hide. Oil prices were obviously at historically low levels in the second quarter, including a brief trip deep into negative territory. Typically, during downturns, the majors are shielded by their downstream refining assets – low crude prices lower input costs and cheap fuel tends to stoke demand.
However, the pandemic obviously shut everything down, so demand contracted sharply. With hundreds of millions of people confined to their homes, it didn’t matter if fuel was cheap. As a result, refining margins collapsed.
So, too, did petrochemical demand. Chemical units were unlikely to bolster the battered finances of the oil giants. Meanwhile, the global market for LNG has also plummeted. Natural gas has been another segment in which the oil majors are betting their future growth. But Covid-19 has ravaged gas markets as well.
Perhaps the numbers won’t be as bad as expected. On Friday, Equinor posted a surprise profit, earning $350 million in adjusted earnings. That was down nearly 90 percent from a year earlier, but it beat expectations.
There are a few caveats to these seemingly better-than-expected numbers. The Norwegian company said that it performed better not because of its oil and gas production, but in part because it profited from trading. “While the strong trading result was positive, we believe this should not be extrapolated,” DNB Markets said in a note to clients.
Another glaring issue is that Equinor has not adjusted its long-term oil price assumptions. While BP and Shell announced massive impairments – $17.5 billion and $15-$22 billion, respectively – the Norwegian oil company avoided taking any write-downs by leaving its oil price assumptions unaltered. Equinor is counting on a Brent price of $80 per barrel in 2030. The company said it would update this assumption in the third quarter, so any potential write-downs will come later.
To its credit, Equinor cut its dividend earlier this year, the first large western oil company to do so. That eased the cash flow pressure.
The upcoming earnings figures could result in more announcements like that. Analysts are anticipating a dividend cut from BP. The aforementioned writedown made huge news a few weeks ago. The British oil company has also announced in June that it would lay off 15 percent of its workforce, eliminating 10,000 jobs.
Earlier this year, BP made headlines when it said that it plans on overhauling operations to become a much lower-carbon energy company over time. Maintaining a hefty dividend would require piling on much more debt, which would hamper the company’s transition plans, analysts say.
Meanwhile, ExxonMobil and Chevron have refused to cut their dividends. Chevron just bought Noble Energy in a high-profile deal that expands the company’s footprint in U.S. shale and the Eastern Mediterranean. ExxonMobil, meanwhile, is sticking with its aggressive growth plans in the Permian and Guyana.
The strategy will surely lead to more debt. The oil majors took on $80 billion in debt in the second quarter, according to Bloomberg. That will allow them to maintain their respective strategies for a little while longer. But more debt carries the risk of credit rating downgrades. Exxon, for instance, added $8.8 billion in debt in the second quarter and is on track to increase debt to $78 billion by the end of 2022, according to Bloomberg and Goldman Sachs.
Exxon also has refused to write down assets, a stubbornness that has earned it quite a bit of criticism. Particularly in the context of uncertain long-term demand, Exxon’s refusal to acknowledge the risk seems to be untenable. But we will learn more in the coming days if the oil majors plan on making any change in direction.
By Nick Cunningham