It was a week whenoil prices fell below $18 a barrel at one point, while natural gas finished slightly higher.
On the news front, oilfield service majors Schlumberger SLB and Halliburton HAL reported first-quarter earnings. While both the well-established names came up with better-than-expected bottom line numbers, they warned that the impact of coronavirus pandemic and the oil price slump will be felt more severely in the upcoming quarters. Meanwhile, E&P biggie ConocoPhillips COP slashed its 2020 capital budget to weather the oil market rout.
Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures slumped 19.7% to close at $18.27 per barrel, natural gas prices gained 1.2% for the week to finish at 1.753 per million Btu (MMBtu). In particular, the oil markets extended their decline from the previous week when the commodity fell sharply, forcing even ExxonMobil XOM to slash its capital budget by a stunning 30%.
Coming back to the week ended Apr 17, the crude benchmark crashed to its lowest level in two decades as concerns about the coronavirus-induced demand destruction continue to outweigh the historic OPEC+ deal to curb production. Further, the U.S. Energy Department's latest inventory release revealing record increase in oil stockpiles also had a negative effect on the commodity.
Meanwhile, natural gas ended slightly higher on prospects of lower volumes. The fuel gained on expectations of a cut in shale oil production that will also limit associated gas output, thereby reducing the massive supply glut. However, the narrative remains bearish as natural gas faces the prospect of a coronavirus-related steep drop-off in usage. The commodity is already coming off a mild winter amid strong production that kept inventories well above normal. In fact, natural gas recently slumped to its lowest price since 1995.
Recap of the Week’s Most Important Stories
1. Schlumberger’s first-quarter 2020 earnings of 25 cents per share (excluding charges and credits) surpassed the Zacks Consensus Estimate by a penny. The better-than-expected bottom line can be attributed to resilience in the company’s international business, which performed amid a difficult operating environment.
Due to the current market uncertainty, Schlumberger declared quarterly dividend of 12.50 cents, reflecting a 75% decline from the prior dividend payout of 50 cents. The announced dividend is payable on Jul 9 to shareholders of record on Jun 3. This move will likely allow the company to conserve cash.
Schlumberger projects 2020 capital expenditure at $1.2 billion, suggesting a decline from the 2019 level of $1.7 billion. Overall capital investment — which includes capital expenditures, and multiclient and APS investments — is expected to be $1.8 billion, indicating a 30% decrease from 2019 levels. (Schlumberger Beats on Q1 Earnings, Cuts Dividend by 75%)
2. Smaller rival Halliburton also delivered better-than-expected first-quarter 2020 earnings as solid international activity offset headwinds in North America. The company reported earnings of 31 cents per share, surpassing the Zacks Consensus Estimate of 25 cents. Moreover, the bottom line was 34.8% higher than the year-ago figure of 23 cents.
Operating income from the Completion and Production segment came in at $345 million, falling 6.25% below the year-ago level of $368 million but beating the Zacks Consensus Estimate of $344 million. Drilling and Evaluation unit profit rose from $123 million in the first quarter of 2019 to $217 million in the corresponding period of 2020. Moreover, the segmental income outperformed the Zacks Consensus Estimate of $164 million.
Even as the company relentlessly battles a challenging business landscape in North America, it is looking to boost free cash flow generation and improve returns. This Houston, TX-based industry player plans to curb its overhead and other expenses by $1 billion. It further limits its capital investment budget to $800 million and aims to better its working capital resource. (Halliburton Q1 Earnings Top on International Activity)
3. As part of further measures against the impact of coronavirus, ConocoPhillips has announced a new capital budget for 2020 of $4.3 billion, showing an additional reduction of $1.6 billion. Hence, as compared to the initial guidance, the upstream energy firm has slashed capital budget by a total of $2.3 billion. This also reflects a reduction of 35% from the original estimate.
Triggered by lower capital spending, ConocoPhillips will reduce some production volumes. the company’s net production will get lowered by 200,000 barrels of oil equivalent per day (BoE/D) in North America – contributing the maximum to the company’s worldwide output. Per Bloomberg, with the measure, the Zacks Rank #3 (Hold) company’s volumes in the continent will get reduced by a massive 27%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Further, ConocoPhillips has decided to cut 2020 planned operating expenses by an additional $600 million to $5.3 billion. Investors should also know that last month, ConocoPhillips decided to slow down the pace of its 2020 stock buy-back program. As part of its earlier decision, the company had announced that starting second quarter, the quarterly run rate of the program will be lowered to $250 million from the prior $750 million. But in response to the downturn in energy market, the company has now vouched to suspend its share repurchase program. (Here's What ConocoPhillips is Doing to Deal With Coronavirus)
4. Royal Dutch Shell’s RDS.A Australia-focused JV recently entered into a final investment decision (‘FID’) to advance with the first phase of its Surat Gas Project in Queensland for addressing the energy crisis in that country. The JV Arrow Energy is co-owned by Shell and PetroChina Company Limited.
The first phase of this $6.4-billion worth project, which was green-lighted by the Queensland government last February, is expected to produce as much as 90 billion cubic feet per year of new natural gas at the optimum level.
At a time when the downward economic curve due to oil and gas price slump caused by the coronavirus already prompted energy giants to defer their investment decisions on projects, Shell’s major investment will inject substantial amount of cash into Australia’s A$2-trillion economy, which is likely to ease the tight gas market of the island nation. The Surat project start-up will also aid Australia to improve its gas production as its south-eastern region is expected to suffer gas scarcity in the near future. (Shell Makes FID on Surat Gas Project, Focuses on Down Under)
5. Baker Hughes Company BKR recently announced plans to slash 2020 net capital spending by more than 20%. Also, the oilfield service major conducted an interim quantitative impairment test at first-quarter end, in the wake of coronavirus-induced unfavorable business scenario. As such, it expects to book a $15-billion non-cash goodwill impairment charge in first-quarter 2020, which is not expected to impact cash flow.
Moreover, in response to the current market conditions, Baker Hughes has adopted a plan that will lead to restructuring, impairment and other charges of $1.8 billion. Notably, of the total amount, $1.5 billion is expected to be recorded in the first quarter. Future cash expenditures related to the charges mentioned above will likely be $500 million, with an estimated payback within a year.
Spending cut by 20% from 2019 levels will free up some cash, which will help it navigate through oil and gas price crash, and the demand destruction from the coronavirus pandemic. The company recorded capital expenditure of $976 million in 2019. (Baker Hughes to Cut Net Capex by 20%, Book $15B Writedown)
The following table shows the price movement of some the major oil and gas players over the past week and during the last 6 months.
Company Last Week Last 6 Months
XOM +0.2% -36.1%
CVX +3.4% -30.3%
COP +1.5% -42.4%
OXY -11.3% -69.8%
SLB -7.2% -56.5%
RIG -17.4% -74.9%
VLO +3.3% -50.6%
MPC -0.7% -66.3%
The Energy Select Sector SPDR – a popular way to track energy companies – was essentially unchanged last week. But longer-term, over six months, the sector tracker is down 40.5%. Offshore driller Transocean Ltd. RIG was the major loser during this period, experiencing a 74.9% price plunge.
What’s Next in the Energy World?
As global oil consumption plunges amid a supply glut, market participants will be closely tracking the regular releases to watch for signs that could indicate a rebound. In this context, the U.S. government statistics on oil and natural gas - one of the few solid indicators that comes out regularly - and the Baker Hughes data on rig count, will be on the energy traders' radar, plus the 2020 Q1 earnings, with a few energy biggies coming out with quarterly results.
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Exxon Mobil Corporation (XOM) : Free Stock Analysis Report
Transocean Ltd. (RIG) : Free Stock Analysis Report
Schlumberger Limited (SLB) : Free Stock Analysis Report
Halliburton Company (HAL) : Free Stock Analysis Report
ConocoPhillips (COP) : Free Stock Analysis Report
Royal Dutch Shell PLC (RDS.A) : Free Stock Analysis Report
Baker Hughes Company (BKR) : Free Stock Analysis Report
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