It was a week where WTI oil reached its lowest settlement since February 2002, while natural gas futures cratered to 1995 levels.
On the news front, even the ‘Big Oil’ companies don’t seem to be immune to this price crash as evidenced by spending cuts by supermajors Royal Dutch Shell (RDS.A - Free Report) and TOTAL S.A. (TOT - Free Report) .
Overall, it was a forgettable week for the sector. West Texas Intermediate (WTI) crude futures tumbled 29% to close at $22.43 per barrel, while natural gas prices lost 14.2% for the week to finish at 1.604 per million Btu (MMBtu). In particular, the oil markets extended their decline from previous week when the commodity slid below $30 a barrel, prompting a flurry of capex and dividend cut announcements.
Coming back to the week ended Mar 20, the crude benchmark notched its biggest weekly loss since the 1991 Gulf War, as tensions between Russia and Saudi Arabia combined with continued panic over the spreading coronavirus sent the commodity crashing further. Oil fundamentals appear to be struggling under the twin strains of untamed supply from major producers in the face of crumbling demand caused by the world economic slowdown on the back of the virus outbreak.
Meanwhile, natural gas futures fell to their lowest level in more than two decades as the fuel faces the prospect of a coronavirus-related steep drop-off in usage. The commodity was already on the defensive because of mild winter weather (leading to pessimistic heating demand) amid strong production.
Recap of the Week’s Most Important Stories
1. As a response to the bearish oil environment, Royal Dutch Shell plans to trim its 2020 capital spending by a minimum of $5 billion from the past projection of $25 billion to $20 billion along with material reductions in working capital. It further plans to cut operating costs by $3-$4 billion over the next 12 months. These capex measures are anticipated to enhance Shell's free cash flow generation to $8-$9 billion on a pre-tax basis.
Apart from the cost cuts, Shell has also suspended its $25 billion share buyback plan to weather the current oil price woes. This integrated energy player maintains its divestment plans worth $10 billion of assets in 2019-20 and will execute the program conditional upon the market conditions.
Notably, investors should know that this Netherlands-based company has a solid financial foundation with $20 billion in cash and cash equivalents. Apart from robust cash reserves, the company can tap into its has$10 billion of undrawn credit lines, while it also has and access to extensive commercial paper programs.
2. Another supermajor TOTAL has decided to lower its 2020 capital expenditure guidance by nearly 20% to less than $15 billion from the prior expectation of $18 billion, after taking into consideration the ongoing decline in commodity prices due to the novel coronavirus outbreak and the price war between Saudi Arabia and Russia.
TOTAL aims at generating more savings in 2020 than its prior expectation. The company now targets to generate $800 million of savings in 2020 on operating costs, instead of $300 million announced previously. In order to preserve its liquidity position, the company also suspended the $2-billion share buyback program.
The unexpected drop in oil prices and decline in global demand are taking a toll on oil and energy companies. The companies have been forced to delay expansion plans and lower capital expenditures to preserve liquidity. (TOTAL Plans to Counter COVID-19 Impact on Oil Prices)
3. In the wake of a weak crude pricing scenario, Italy’s Eni SpA (E - Free Report) announced its decision to take back its plan of authorizing €400 million stock repurchases in 2020.
With oil price now in the bearish territory since the coronavirus pandemic is hurting global energy demand, the outlook for exploration and production business seems gloomy. Thus, upstream energy players are restricting their operational activities and thereby reducing capital budget. Eni — an integrated energy player with huge upstream business — will also be considering to slash its capital budget and anticipated cost levels to cope with the weak crude pricing scenario.
Eni added that it will reconsider the stock buy-back program once the Brent crude price recovers to at least $60 per barrel. Importantly, the integrated energy player has lowered its forecast for Brent crude for 2020 and 2021 to $40-$45 per barrel and $50-$55 per barrel, respectively. In view of the downward revision in commodity prices, the company has decided to review its business plan for 2020-2021. (Eni Withdraws Share Repurchase Plan Amid Crude Oil Plunge)
4. ConocoPhillips (COP - Free Report) recently announced that it has revised downward its 2020 capital budget in the wake of a weak crude pricing scenario. The company’s revised capital budget for this year will be roughly 10% lower as compared to the prior guidance.
Reduced operating activities also compelled the upstream firm – carrying a Zacks Rank #3 (Hold) – to lower its production guidance for this year. ConocoPhillips’ revised projected daily production volumes for 2020 will be lowered by 20,000 barrel of oil equivalent.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Moreover, the company has an intention of slowing down the pace of its 2020 stock buy-back program. Starting second quarter, the quarterly run rate of the program will be lowered to $250 million from the prior $750 million. With all those measures, ConocoPhillips believes that it will be able to save a total cash amount of $2.2 billion. (ConocoPhillips Slashes 2020 Capex as Oil Price Remains Soft)
5. EOG Resources (EOG - Free Report) recently announced its plan to reduce capital expenditure for 2020 by 31% to $4.3-$4.7 billion due to the ongoing turmoil in the hydrocarbon market, which slashed oil prices. The company’s revised plan is expected to generate strong returns even in the $30 per barrel of oil environment.
EOG Resources expects its 2020 net cash from operations to cover its capital expenditures and dividend payments. The updated budget is not likely to alter the company’s production scale, marking its increased efficiency in operations. The company anticipates 2020 production in the range of 446-466 thousand barrels of oil per day, almost in line with the 2019-level.
It is planning to decrease activities in some of its operating areas while focusing on its drilling activities in the Delaware Basin and at South Texas Eagle Ford. It intends to maintain balance sheet strength in this volatile commodity price environment. (EOG Resources to Curb 2020 Capex Maintaining Flat Production)
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 -14.1% -54.6%
CVX 28.8% -53.8%
COP -14.5% -57.9%
OXY -28.3% -76.3%
SLB -11.6% -62.8%
RIG -32.9% -80.6%
VLO -22.5% -54.9%
MPC -24% -69.7%
The Energy Select Sector SPDR – a popular way to track energy companies – fell 19.7% last week. The worst performer was offshore driller Transocean Ltd. (RIG - Free Report) whose stock slumped 32.9%.
Longer-term, over six months, the sector tracker is down 58.2%. Transocean was the major loser during this period too, experiencing a 80.6% price plunge.
What’s Next in the Energy World?
With the price of crude falling to its lowest level in nearly two decades, 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 energy traders' radar.
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