Pandemic hammers oil earnings as drillers brace for more

Source: By Mike Lee, E&E News reporter • Posted: Monday, August 3, 2020

The oil industry had one of its worst financial quarters ever as the coronavirus pandemic spread — and the world’s top oil companies say they’re preparing for the downturn to last as long as 18 months.

The four supermajor oil producers that reported earnings last week — Royal Dutch Shell PLC, Total SA, Exxon Mobil Corp. and Chevron Corp. — lost a combined $36.1 billion from April to June.

The companies attributed most of the decline to government-ordered lockdowns and other measures to combat COVID-19, which dramatically cut into oil and gas demand. And executives say they are preparing for an uncertain future as the virus continues to grip the U.S. and other parts of the world.

Total predicted that the price for the international standard Brent crude, which was about $68 a barrel at the beginning of the year, will stay around $40 a barrel through 2021, and rise to $50 a barrel in 2022.

“What’s happened with COVID-19 is that it’s really forcing companies to reassess the long-term picture for oil demand,” Ben Cahill, a senior fellow with the Energy Security and Climate Change Program at the Center for Strategic and International Studies, said in an interview.

“This idea that demand would eventually grow and prices would inevitably rise over the medium term — that’s been a driving philosophy in the oil industry for a long time. People are really questioning that now,” he said.

That price outlook would keep a tight lid on oil companies’ profits, analysts say, and stifle appetite for new drilling. That will affect not just the Big Oil corporations but also the independent companies that dominate production in the U.S. Many of those businesses will begin reporting their second-quarter earnings this week.

The losses at Shell, Total and Chevron included billions of dollars in asset write-downs and other noncash items. The two European majors eked out small cash profits, as their oil-trading businesses partly offset yawning losses elsewhere.

The losses by Exxon and Chevron were led by declines in their U.S. operations, and the companies warned that the situation won’t improve for at least six months. Shell and Total didn’t provide a breakdown of their U.S. ventures. BP PLC, the other member of the “Big Five” oil companies, reports its results tomorrow.

Exxon’s U.S. upstream operation — the division that produces oil and gas — swung to a $1.2 billion loss from a $355 million profit in the same quarter a year ago. Chevron’s U.S. upstream division reported a $2.1 billion loss, compared to an $866 million profit last year.

Exxon said it plans to reduce the number of drilling rigs in the Permian Basin, the biggest U.S. oil field, from about 30 at the end of June to 15 by the end of the year. Chevron plans to cut its Permian rig count to four, from 17 at the beginning of the year.

“In terms of the Permian, it’s simply, we don’t see the point of investing in any assets around the world to bring on new production capacity when the world is so heavily oversupplied,” Chevron Executive Vice President Jay Johnson said on a conference call with analysts.

Exxon and Chevron have the flexibility to slow down drilling in the U.S. because so much of their oil comes from other parts of the world where the cost of producing it is lower.

Sustained low prices could be a challenge for independent producers in the U.S., said Lysle Brinker, executive director in the Upstream Energy Group at the consulting firm IHS Markit.

The companies will be forced to drill new wells to offset the decline in production from their existing ones, but they won’t be able to turn a profit until the price recovers, he said. And they were already being cut off by both investors and lenders before the pandemic hit.

“Companies that were financially strong will be able to start spending a little bit more — but a lot of companies are quite sick,” Brinker said.