Pandemic Pain Persists for Big Oil Companies

By Christopher M. Matthews, Rebecca Elliott and Sarah McFarlane

The global oil-and-gas industry remains under extreme financial pressure as demand for fossil fuels rebounds slowly after being crushed by the coronavirus pandemic.

Some of the largest western oil companies including Exxon Mobil Corp. (XOM) and Royal Dutch Shell PLC (RDS/A) signaled this week that key parts of their business continued to struggle through the summer and early fall, which will weigh down the third-quarter results they are set to report in coming weeks.

Exxon warned Thursday that parts of its business continue to be unprofitable, even as the company performed better than in the second quarter. The Texas oil giant said it expected earnings from its oil production unit to improve by as much as $1.8 billion from the second quarter, but that its natural gas sales and its refining business may lose more money. Analysts forecast a quarterly loss of more than $500 million when the company reports on Oct. 30, which would mark its third consecutive quarter in the red.

Shell said Wednesday it would cut up to 9,000 jobs in a broad restructuring, and warned it was also poised to report poor third quarter earnings, including a second consecutive quarterly loss in its oil-and-gas production business. The planned job cuts follow similar moves at peers including BP PLC and Chevron Corp. to rein in costs amid the pandemic. Exxon has said it is conducting a workforce review, which may lead to layoffs.

This year's lousy oil-and-gas earnings have turned off many investors, who remain unenthusiastic about the companies despite a modest rebound in crude prices from the historic lows of this spring. A stock index of U.S. oil-and- gas companies is down about 55% in 2020 even as the overall stock market is up slightly. Exxon's shares are down around 50% so far this year, while Shell's are down about 58%.

U.S. benchmark oil prices remain around $40 a barrel, levels too low for most exploration and production companies to turn a profit, and smaller, independent players continue to face a struggle for survival. On Wednesday, Houston-based shale driller Oasis Petroleum Inc. filed for chapter 11, joining at least three dozen other North American oil-and-gas producers in seeking bankruptcy protection this year, according to law firm Haynes and Boone LLP.

"Due to historically low global energy demand and commodity prices, we determined that it is best for Oasis Petroleum to take decisive action to strengthen our liquidity and overcome the headwinds now challenging both our company and industry," Oasis Chief Executive Thomas Nusz said in a statement.

As the number of global Covid-19 infections continue to rise, the return of restrictions that could reduce the number of cars on the road and overall economic activity is leading to market pessimism that oil demand will take a long time to recover. Russia's energy ministry has said it doesn't expect a fast recovery, while Vitol Group, the world's biggest independent oil trader, said earlier this week it doesn't expect oil prices to rise until 2021.

"The demand side of the equation will continue to be under threat during the fourth quarter of the year, with Covid-19 cases rising at an alarming rate, notably in Europe, which has already imposed new restrictions to curve down the number of cases," said Paola Rodriguez-Masiu, an analyst at Rystad Energy.

Rystad expects around 150 additional North American oil and gas producers to file for bankruptcy by the end of 2022 if crude prices remain around $40 a barrel.

The U.S. is now generating less than 11 million barrels of oil daily, down from around 13 million barrels a day early this year, Energy Information Administration data show. Two-thirds of oil-and-gas executives who responded to a recent survey by the Federal Reserve Bank of Dallas said they think U.S. oil production will never fully recover.

Meanwhile, domestic consumption of gasoline and distillates including diesel remains depressed, down roughly 9% from a year ago, according to the EIA. That is weighing on refiners such as Marathon Petroleum Corp., which said Wednesday that it was laying off some 2,000 employees. Many of those cuts are tied to the company's recent decision to keep two of its refineries idled indefinitely. In all, Marathon Petroleum is cutting around 12% of its jobs, excluding roles at its Speedway gas station chain, which 7-Eleven Inc. has agreed to buy.

For major oil companies with large liquefied natural gas businesses, analysts expect weaker margins. LNG is sold via long-term contracts where prices are often linked to oil with a time lag of 3 to 6 months. That means the fall in oil prices earlier this year only reached LNG during the third quarter.

"The macro environment certainly was very difficult and profitability will have deteriorated in refining and LNG," said Irene Himona, an analyst at Société Générale, who expects another tough quarter for major oil companies.

Longer-term doubts are also clouding the industry's outlook as it contends with competition from renewable energy sources, the prospect of tightening government regulations and the increased use of electric vehicles. BP said in September that global oil demand could have already peaked and that it would potentially never recover to pre-pandemic levels.

BP, Shell and other major European fossil fuel companies have said they plan to invest heavily in renewable energy over the next decade. Exxon, Chevron and most U.S. shale companies remain committed to oil and gas.

Dan Pickering, chief investment officer of Pickering Energy Partners LP, said that the industry has lost some investors over concerns about the energy transition, even though the world will need large amounts of oil and gas for decades to come.

"It has been a slow-growth business for a long time. It may turn into a no growth to a declining business for a long time," Mr. Pickering said.

Still, some executives are hopeful that the reduced investment in oil and gas production this year will result in higher oil prices in future. Total SA has drawn up a 10-year investment plan based on a $50 a barrel price for the Brent crude oil benchmark. On Thursday, Brent oil traded for around $41 a barrel.

"We are at $40 in the middle of a huge crisis where we have seen a big oversupply and a huge lack of demand," Total Chief Executive Patrick Pouyanne told investors this week. "I am sure that in two to three years we will see higher prices and forget like we have done in the last five years," he added.

Write to Christopher M. Matthews at christopher.matthews@wsj.com, Rebecca Elliott at rebecca.elliott@wsj.com and Sarah McFarlane at sarah.mcfarlane@wsj.com


  (END) Dow Jones Newswires
  10-01-20 1247ET
  Copyright (c) 2020 Dow Jones & Company, Inc.

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