Bloomberg : "Sunset for Oil Is No Longer Just Talk . . . Shell, at least, is putting its money where its mouth is. The supermajor is running down reserves and paying out cash."

(edited)

FROM BLOOMBERG ARTICLE:

.  .  .  All those fine words aren’t just greenwash, but the sign of a company having genuine doubts about the long-term future of its core business. Weak investment in reserves growth; unusual priorities for growth capex; and promises around shareholder returns all suggest a business with its eye on a coming plateau in oil demand."

Russia understands this.  Russian oil companies and Putin are happy with $60 oil.  They understand the reality of the oil production world.

Long Sunset but it is a Sunset.  The universal solution is Petrochemicals where growth is projected.  First this plays right into U.S. light oil, Naphtha, Condensate and Natural Gas Liquids. 

However, recent increase of new Petrochemical Plants in U.S. , China and Asia at large has caused an over supply. Margines for Asia refineries and Petrochemical plants have been swueezed. China is playing same game with Asian Petrochemical companies as it did with US manufacturers. .  .  . squeeze them with subsidized production. China recently authorized export volume increases . . . . .  same 'ol playbook.

Oil industry will consolidate.  Companies will trade on their return (dividends).  Petrochemical industry will grow next 5 years then it too will consolidate.  U.S. shale is positioned well.

Sunset will not happen overnight. It won't happen all this year.  BUT IT HAS STARTED THIS YEAR. It's effect will be felt this year and for years to come.

There will be over 200 Electric Vehicle models available (many at very reasonable prices) by 2023.

Crown Prince Mohammed bin Salman held a meeting with Silicon Valley Executives not long ago.  He wanted to bring technology companies to Saudi Arabia (good luck).  At the meeting MBS stated that the electrification of the world is accelerating and that he had " twenty years to transform the Saudi economy". 

True story.  I think (and maybe Shell thinks) twenty years is way to generous. ..

Many oil investors still in denial. The oil industry will be around for a while, however Saudis are not going to realize a 98% gross margin much longer.  MBS and some others realizes this but will never admit it in public. Others are in denial.   Saudi Vision 2030 is a mirage. How could it possibly work.

Edited by Falcon

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Do you think they may be handing out cash to rebuild investor confidence for future endeavors? 

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20 minutes ago, Justin Hicks said:

Do you think they may be handing out cash to rebuild investor confidence for future endeavors? 

I would second that.  Oil use is not going away any time soon, notwithstanding the rantings of the Greenies and radical Left.  Oil is and will remain the foundation building-block of prosperity.  That said, new reserves of oil, especially deep offshore oil, are expensive to develop.  I suspect Shell is calculating that other sources, including Canada WCS and Venezuelan heavy, once the dictatorship is removed, will be cheap enough and reliable enough to offset their own development of sea oil. Shell's refined products likely have much higher margins than pumping crude. Why blow the capital, especially if prices will be depressed once WCS and Venezuela are back on line in large volumes? Jut buy the crude and go refine it. 

 I am not a "field guy," so anyone with knowledge of the intricacies of costing in well development and risk factors, please chime in. 

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8 hours ago, Justin Hicks said:

Do you think they may be handing out cash to rebuild investor confidence for future endeavors? 

The writting is on the wall. Per Shell and Chevron offshore B/E sub $30 bbl. Permian shale B/E in $20s. 

Only reason Saudi /OPEC could charge $100 bbl for oil was because it cost IOCs $70 bbl to lift.  The economics have changed. Real oil market competition poised to begin.

Does anyone believe Saudi Arabia will see sustainable $85 bbl oil again.

I think Shell genuinely believe the industry has seen its better days. Right or Wrong the Green movement will accelerate the decline.(Remember 6 years ago Shell was first major to focus more on natural gas over oil. They are not totally forsaking oil, just being realistic about its future and prioritizing natural gas)

Look at what China's conversion to electric buses has become.  Every US and European city mayor will soon mandate electric buses. What's after that . . . elelectric taxi cabs, Uber cars, police cars, public service cars, postal delivery trucks , etc.

When there are 200 new EV models available (some at very reasonable prices) governments will pass legislation to incent and grow EV sales.  Many European countries have already proposed outlawing combustion engine for new car purchades. Once a plethora of EVs in wide range of prices are available they will certainly move forward with legislation.

Even more efficient combustion engines,solar and wind cost reductions continue.  

All together will decrease demand.  Long term increase in emerging markets like Central American, South America, Africa, India will grow demand but nowhere close to make up for other demand loss.

Edited by Falcon
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10 minutes ago, Falcon said:

I think they genuinely believe oilondustry has seen its better days. Right or Wrong the Green movement will accelerate the decline.

Look at what China's conversion to electric buses has become.  Ever US and European liberal mayor will soon mandate electric buses.

When there are 200 new EVs available governments will pas legislation to grow EV sales.  

Even more efficient combustion engines. Solar and wind cost reductions continue.  

All together will decrease demand.  Long term increase in emerging markets like Central American, South America, Africa, India will grow demand but nowhere close to make up demand.

Accept the reality and adapt the business model to the new reality. There's still lots of life in the oil industry, but it will be a decline from this point... 

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2 hours ago, Rasmus Jorgensen said:

Accept the reality and adapt the business model to the new reality. There's still lots of life in the oil industry, but it will be a decline from this point... 

Agreed.

No longer invest for stock price appreciation (though there will be some). Invest for dividend yield (like a bond)

Oil not going away but natural law of SUPPLY and DEMAND (along with cost of production falling) will prevail.

The question is when $55 Brent is the norm what happens to countries whose economies are dependent on higher oil prices. 

Oil majors want to be consolidators in Permian and other basins.  But little consolidation.  Why ?  

Buyout bid depends on total assets. Assets = total reserves X $ per bbl.  

Sellers want to base assets at recent WTI of $60 to $65.  Oil majors will only pay for assets based on where the WTI $ per bbl is eventually going (18 months out) of $45 to $50 bbl

 

Edited by Falcon

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3 hours ago, Justin Hicks said:

Do you think they may be handing out cash to rebuild investor confidence for future endeavors? 

 

3 hours ago, Jan van Eck said:

I would second that.  Oil use is not going away any time soon, notwithstanding the rantings of the Greenies and radical Left.  Oil is and will remain the foundation building-block of prosperity.  That said, new reserves of oil, especially deep offshore oil, are expensive to develop.  I suspect Shell is calculating that other sources, including Canada WCS and Venezuelan heavy, once the dictatorship is removed, will be cheap enough and reliable enough to offset their own development of sea oil. Shell's refined products likely have much higher margins than pumping crude. Why blow the capital, especially if prices will be depressed once WCS and Venezuela are back on line in large volumes? Jut buy the crude and go refine it. 

 I am not a "field guy," so anyone with knowledge of the intricacies of costing in well development and risk factors, please chime in. 

With sufficiently low interest rates, could it make sense for corporations to pay out dividends & finance future projects with debt?

If said corporations expected high inflation, would that strengthen the argument for debt-fueled projects? 

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The problem is that you can’t believe everything you read in the media. The left leaning journalists will alter the narrative to discourage you from anything oil, plus the big oil companies know how powerful social media can play in their future. 

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11 hours ago, BenFranklin'sSpectacles said:

 

With sufficiently low interest rates, could it make sense for corporations to pay out dividends & finance future projects with debt?

If said corporations expected high inflation, would that strengthen the argument for debt-fueled projects? 

I'm trying to think of this as a major. If my credit rating is AA I can probably float bonds very cheap, there's my capital. Or borrow from banks at LIBOR plus 80 basis points. The one thing that doesn't make much sense is paying a high dividend and buying back a bunch of stock. 

Maybe Shell is trying to break the analyst stranglehold, where the stock is perpetually tied to reserves and reserves replacement. If Shell can move over to the widows and orphans category, they'll stop with the wild swings tied to oil prices. Maybe they'll get the market to treat them like a large utility?

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10 hours ago, Ward Smith said:

I'm trying to think of this as a major. If my credit rating is AA I can probably float bonds very cheap, there's my capital. Or borrow from banks at LIBOR plus 80 basis points. The one thing that doesn't make much sense is paying a high dividend and buying back a bunch of stock. 

Maybe Shell is trying to break the analyst stranglehold, where the stock is perpetually tied to reserves and reserves replacement. If Shell can move over to the widows and orphans category, they'll stop with the wild swings tied to oil prices. Maybe they'll get the market to treat them like a large utility? 

Why doesn't it make sense to pay dividends & buy back stock? 

I'm not an expert in these things, but now that I think about it, it would be incredibly useful to understand them.  Can you recommend a particular curriculum to get started?

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(edited)

On 6/8/2019 at 12:50 AM, Ward Smith said:

I'm trying to think of this as a major. If my credit rating is AA I can probably float bonds very cheap, there's my capital. Or borrow from banks at LIBOR plus 80 basis points. The one thing that doesn't make much sense is paying a high dividend and buying back a bunch of stock. 

Maybe Shell is trying to break the analyst stranglehold, where the stock is perpetually tied to reserves and reserves replacement. If Shell can move over to the widows and orphans category, they'll stop with the wild swings tied to oil prices. Maybe they'll get the market to treat them like a large utility?

Majors buying back stock and providing dividends be cause Big Oil is a Sunset industry.  Albeit a long Sunset. Majors have no control over their book value. It will rise or drop based on price of oil.  Shell has no control over the world production levels, thus price per bbl. Price can plummet 50% rather quickly.

Oil investments now trading like a bond.  Dividend yield.

Large independents now want to be bought out.  Majors are not suckers. Should have sold when it was a sellers market.  It's a buyer's market from here forward.

Simply put, Supply and Demand. Cartel is dying. Free markets coming to oil.

Listen to those in the know:

Chevron CEO "Cut costs or die"

Exxon CEO , "OIL Industry in transition"

Shell CEO, "Deep water break even now sub $30"

Legendary Oil Investor Andy Hall, "Oil no longer trades on Fundamentals. It's like self fulfilling prophecy "

What other commodity trades off of a comment by Saudi oil minister Khalib al- Falih.  He's not the Oil god. He/Saudis have their own agenda  .  .  .  .  survival.

If they keep the production cuts on forever it will not help in the long run.  Their "tight oil" narrative will someday be exposed. Just a canard. They will continue selling this ruse as long as people buy it. 

Over 140 mm bbls increase in world inventories year-to-date.

Saudi Arabia purports to have 270 Billion Barrels of oil reserves. How much of that never sees the light of day . . . stranded assets.

One thing the Saudis don't tell you regarding their premier oil field.

They really can't increase production too much without affecting pressure. Too much production will reduce  pressure and ultimate yield.  

Edited by Falcon
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4 hours ago, BenFranklin'sSpectacles said:

Why doesn't it make sense to pay dividends & buy back stock? 

I'm not an expert in these things, but now that I think about it, it would be incredibly useful to understand them.  Can you recommend a particular curriculum to get started?

Paying dividends and buying stock costs money. If you're borrowing to pay dividends then you're effectively borrowing twice. Buying back stock has never appealed to me. It means you've no imagination about what to invest in. It used to be against the law, since it can artificially inflate the "value" of your stock. But everyone is doing it nowadays, sadly. 

So called retail investors don't matter, institutional investors matter, they control something like 98% of the "float", which is the shares outstanding and traded. The problem today is activists are pressuring institutions to divest out of the fossil fuel industry. Hell, even the Norwegian sovereign wealth find is getting out of fossil fuel stocks, even though 99% of the money that went into came from fossil fuels. 

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Shell are one of the few companies that heavily invest in innovations In house in all sectors, it’s quite impressive how they embrace their collaborators to develop new technology which they then turn loose for all to use.

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5 hours ago, Ward Smith said:

Paying dividends and buying stock costs money. If you're borrowing to pay dividends then you're effectively borrowing twice. Buying back stock has never appealed to me. It means you've no imagination about what to invest in. It used to be against the law, since it can artificially inflate the "value" of your stock. But everyone is doing it nowadays, sadly.

Buying back stock instead of paying dividends is a massive tax avoidance scam by business / executives.

Instead of paying a executive a huge salary you pay them a "small" salary and give them a bunch of shares and options.  Then when the company makes money it buys back shares (from others) to raise the price such that they get a big payout. 

Creating shares costs them nothing other then share price "dilution" - buy back or "concentration" disproportionately benefits the executives.

This is how Amazon pay essentially no tax.

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On 6/7/2019 at 7:43 AM, Jan van Eck said:

Shell's refined products likely have much higher margins than pumping crude. Why blow the capital, especially if prices will be depressed once WCS and Venezuela are back on line in large volumes? Jut buy the crude and go refine it

 

Here in Alberta the smaller oil companies are begging for the damn pipelines because of the price differential.  The few with refineries of their own (Suncor etc.) don't seem to care.  Their downstream refineries make so much money using the cheap feed-stock that their low-profit upstream "wells" don't matter so much.

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On 6/7/2019 at 9:43 AM, Jan van Eck said:

Shell's refined products likely have much higher margins than pumping crude. Why blow the capital, especially if prices will be depressed once WCS and Venezuela are back on line in large volumes? Jut buy the crude and go refine it. 

Exxon direction may be the next business model.

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On 6/8/2019 at 6:48 PM, Enthalpic said:

Buying back stock instead of paying dividends is a massive tax avoidance scam by business / executives.

Instead of paying a executive a huge salary you pay them a "small" salary and give them a bunch of shares and options.  Then when the company makes money it buys back shares (from others) to raise the price such that they get a big payout.

I would vote in a second for banning 100% all corporate managers from receiving stock bonus's.  Why?  All this does is incentivize them to destroy the company long term for short term profits. 

As for buying back stock.... Are you trying to prove you have never run a business?  As a business you MUST retain ownership to determine LONG TERM directional stability otherwise some bankster/pension fund/Mutual fund assholes buy up 55% of your company and milk the company dry by eliminating all R&D, take zero risk in developing any product(only tiny changes), destroy long time loyal employees by cutting wages etc.  So, HELL NO!  Want an example?  GE is a PERFECT example.  Microsoft is ANOTHER(73% owned by idiots who know NOTHING about software).  There are literally another Russel 2000 examples of this...

PS. Trump admin is finally getting rid of the idiotic postage rules which allows "developing countries" to ship products from another continent cheaper than from another state.  All this does is allow foreign mom and pop counterfeiters to flood the market with cheap lousy crap destroying small town/city manufacturers.  Bet Canada, UK, EU will follow suit.  Should have been repealed when WTO/NAFTA/CAFTA/EU trade deals were signed.

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On 6/7/2019 at 3:58 AM, Falcon said:

FROM BLOOMBERG ARTICLE:

Russia understands this.  Russian oil companies and Putin are happy with $60 oil.  They understand the reality of the oil production world.

Long Sunset but it is a Sunset.  The universal solution is Petrochemicals where growth is projected.  First this plays right into U.S. light oil, Naphtha, Condensate and Natural Gas Liquids. 

However, recent increase of new Petrochemical Plants in U.S. , China and Asia at large has caused an over supply. Margines for Asia refineries and Petrochemical plants have been swueezed. China is playing same game with Asian Petrochemical companies as it did with US manufacturers. .  .  . squeeze them with subsidized production. China recently authorized export volume increases . . . . .  same 'ol playbook.

Oil industry will consolidate.  Companies will trade on their return (dividends).  Petrochemical industry will grow next 5 years then it too will consolidate.  U.S. shale is positioned well.

Well no not really.  Because they are buyers, not producers.  Already seeing this is not true as SA, UAE among others are massively increasing petrochem business.  Now as a giant manufacturer, you must have a gigantic petrochem business to build everything and part of that building requires massive petrochem plants localized.  So all one is truly seeing is centralization of an industry allowing peripheral products to be made much cheaper just as has always been true in the USA. 

Now you CAN argue that China is susbidizing the building of the petrochem plants with cheap steel which is massively subsidized with cheap coal/ore etc.....

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1 hour ago, Wastral said:

Well no not really.  Because they are buyers, not producers.  Already seeing this is not true as SA, UAE among others are massively increasing petrochem business.  Now as a giant manufacturer, you must have a gigantic petrochem business to build everything and part of that building requires massive petrochem plants localized.  So all one is truly seeing is centralization of an industry allowing peripheral products to be made much cheaper just as has always been true in the USA. 

Now you CAN argue that China is susbidizing the building of the petrochem plants with cheap steel which is massively subsidized with cheap coal/ore etc.....

Respectfully disagree. You're correct many new Petrochemical plants .  Demand will increase. Right now, short term, too much petrochem capacity. Margins suck in Asia.

Petrochem heralded as savior for oil and refining industry. To some extent true.  But like everything all industry eventually becomes over zealous and too much capacity ensues. The advantage will be to those that have oil production and captive petrochem plants.  As oil industry consolidates to the large producers the Petrochem industry will consolidate. First between Independents.

FOR EXAMPLE: DUPONT AND DOW CHEMICAL MERGED. 

Petrochem HAS ALREADY STARTED TO MERGE and will accelerate in the future.

Vertical integrated will survive.

 

Edited by Falcon

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(edited)

31 minutes ago, Falcon said:

FOR EXAMPLE: DUPONT AND DOW CHEMICAL MERGED.

A travesty of the anti trust Sherman act...  They need to be broken up. 

A corporate monpoly/oligarchy(Capitalism) run amok is just as bad as a government monopoly(Socialism/Marxism) run amok

Edited by Wastral
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18 minutes ago, Wastral said:

A travesty of the anti trust Sherman act...  They need to be broken up. 

A corporate monpoly/oligarchy(Capitalism) run amok is just as bad as a government monopoly(Socialism/Marxism) run amok

The point being Petrochemical is merging. I rest my case.

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5 minutes ago, Falcon said:

The point being Petrochemical is merging. I rest my case.

That is a blatantly stupid statement as everyone is ALWAYS trying to merge if they can get away with it.  People love power.  You get power through monopolies.

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3 hours ago, Wastral said:

That is a blatantly stupid statement as everyone is ALWAYS trying to merge if they can get away with it.  People love power.  You get power through monopolies.

What's your problem ? LOL

U R on the wrong blog. The Sherman anti-trust debate is under miscellaneous blog.  Interesting discussions of your monopoly thesis over there. 

 

Edited by Falcon
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I think that the oil majors will eventually follow the path of IBM - keep buying back enough shares to keep earnings per share decent, and pay out a nice dividend.  If the business isn't growing, the capital investment needed for growth no longer is a drain on cash.

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