The coronavirus pandemic has drastically altered lifestyles across the world. With more people preferring to stay at home and commute less, there has been a drastic fall in demand for oil, pushing the commodity to the bearish territory.
With lower oil prices, exploration and production (E&P) players are unable to generate attractive returns for investors, thereby making the possibility to draw significant long-term capital extremely low.
Oil Price Plunges
The price of West Texas Intermediate (WTI) crude has declined more than 35% since 2020-beginning. Strict lockdown measures to contain the spread of coronavirus have dented global energy demand, thereby dragging oil price down. Along with the commodity price plunge, the Zacks Oil-Energy sector has declined 43.2% year to date, significantly underperforming the S&P 500 index’s 2.9% rise.
The path ahead is not going to be smooth either, given the rising number of coronavirus cases, further dampening investors’ sentiments toward the energy sector. This has convinced the International Energy Agency (IEA) to cut its forecast for 2020 oil demand growth.
E&P Firms Struggle to Draw Investments
The weak crude pricing scenario is not much incentive for E&P players to invest in additional oil production. In fact, explorers have significantly reduced their capital budgets. EOG Resources (EOG - Free Report) is a leading upstream energy firm that has set its 2020 capital budget at $3.5 billion, suggesting a 45% decline from the initial budget. Chevron Corporation (CVX - Free Report) , with significant presence in upstream operations, has also planned for a conservative capital spending through 2024.
Investors should know that the world still needs huge oil production in the coming years despite many analysts thinking that demand for the commodity will peak soon. Now, with paltry returns (in the form dividend cuts) coming from E&P firms for shareholders, it has become difficult to draw investments into upstream businesses. In April 2020, Royal Dutch Shell plc unexpectedly cut its dividend payout by 66%, while BP plc (BP - Free Report) slashed the same by half in August.
But the energy sector now requires a huge inflow of patient capital (long-term capital) from investors, with no expectation for immediate profit. Now, the million-dollar question is whether E&P firms will be able to draw significant patient capital. The slate of poor performances and a gloomy outlook for the energy sector paint a very somber picture.
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