Big Oil Investors Bracing for Bad News as Headwinds Gather

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Big Oil Investors Bracing for Bad News as Headwinds Gather



(Bloomberg) -- Slumping energy prices, sluggish global demand and shrinking chemical margins are weighing on the oil industry as its biggest names prepare to announce quarterly results to investors demanding ever-higher payouts.

The so-called supermajors -- Exxon Mobil Corp., Royal Dutch Shell Plc, Chevron Corp., Total SA and BP Plc -- are expected to disclose a 42% plunge in third-quarter earnings, on average, when they post results this week. That drop-off is too steep to blame on the 18% decline in crude oil prices, which means executives will have some explaining to do.

Exxon, Shell, and BP already have already taken steps to manage shareholder expectations by releasing limited data points on things like refinery repairs, asset sales and hurricane impacts on offshore oil production. Nonetheless, investors will be watching for additional color on what to expect for the remainder of 2019.

To make sense of all the moving parts in Big Oil’s earnings reports that start Oct. 29 with BP, look for these five things:

1. Surprises

Most of the bad news already should be priced in. Exxon fell 2.6% on Oct. 2 after disclosing a half-billion dollar hit from lower oil prices, a deficit that wasn’t plugged by improved refining profits.

Meanwhile, Shell warned that oil and gas output inched lower, and its refineries and chemical plants operated at about 90% of full capacity. BP warned that its tax bill rose, production declined, and it incurred an impairment on some assets it sold, factors that dampened hopes of an imminent dividend increase.

2. Petrochemicals

Long touted as Big Oil’s next high-growth opportunity, petrochemicals are languishing. The U.S.-China trade war has weakened demand for plastics amid concerns that $40 billion in planned U.S. Gulf Coast chemical plants will create a glut.

“Current trends continue to suggest a prolonged downturn” in chemicals, RBC Capital Markets analyst Biraj Borkhataria said in an Oct. 17 note. Exxon, with its giant chemical division, is the most heavily affected by this trend among peers.

What Bloomberg Intelligence Says

Chemicals may not recover materially from recent margin contraction, and overhang from oversupply amid economic slowdown is concerning.

--Fernando Valle, analyst

Read the research here.

3. Growth

In a world awash in crude and confronted with climate change, growth is a major conundrum for Big Oil. Should these companies be expanding or winding down? Investors don’t seem to have a clear answer right now. Exxon’s stock has been punished after the company spent too much on future projects while Chevron is regularly challenged on whether it has enough in the tank for growth after 2023.

Meanwhile there’s uncertainty whether Shell can match historic returns with investments in renewables and power, though earlier this month Total CEO Patrick Pouyanne declared the company has already achieved double-digit returns by selling electricity.

Don’t expect major pronouncements on such existential issues, but executives may offer clues to their thinking during earnings conference calls when they’re quizzed about 2020 spending and progress toward asset-disposal targets. BP’s call may get more scrutiny than most after it said earlier this month that longtime CEO Bob Dudley is handing the reins to upstream director Bernard Looney in February.

4. Shale

Exxon and Chevron each plan to more than triple production in the U.S. Permian Basin to 1 million barrels a day by the early 2020s. As for the European giants’ attitude toward shale, BP’s $10.5 billion acquisition of BHP Group Ltd.’s assets last year was a statement of intent.

Analysts will be keeping a close eye on how those companies avoid the pitfalls of smaller rivals stung by overambitious drilling programs, and how their performance stacks up against lofty targets. Despite the production boom, investors have soured on shale because of poor performance by independent producers that burned through nearly $200 billion of cash in the past decade.

5. Dividends

The supermajors have long been among the stock market’s most generous dividend payers but in the new world of plentiful crude and anti-fossil fuel campaigns, increasing payouts and share buybacks are seen as key to retaining investors. Just as critical is whether the companies can afford them: the supermajors’ dividend yields this year surged to more than double the return on 10-year Treasury notes.


While none of the five companies’ dividend programs are in jeopardy, investors are keen to see how sustainable they are when balanced against costly drilling and construction projects, such as Exxon’s $30 billion-a-year spending program, and Shell’s investments in lower-profit renewable power.








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Investors brace for poor U.S. shale earnings amid weak oil and gas prices



(Reuters) - Investors are bracing for weaker results from U.S. shale players in coming days as lower oil and natural gas prices and cost-cutting measures have weighed on third-quarter operations.

Major shale producers ConocoPhillips <COP.N> and Concho Resources <CXO.N> this week kick off quarterly earnings reports for a group whipsawed this year by volatile pricing and investor demands for improved returns. Oil and gas producers have cut drilling and slashed jobs amid worries over pricing outlooks.

U.S. oil prices are down 17% and natural gas is down about 31% from a year ago, undercutting production increases. Costs of job cuts and retiring debt also will pressure profit at some companies, analysts said ahead of reports.

"I think we are moving from a growth to a value phase," said Brad Holly, chief executive at Whiting Petroleum Corp <WLL.N> at a Denver oil conference earlier this month.

Whiting, Devon Energy <DVN.N>, and PDC Energy <PDCE.O> each pared staff in recent months as prices swooned. Cutbacks have spread across the sector, with Halliburton <HAL.N>, Schlumberger <SLB.N>, and Patterson-UTI Energy <PTEN.O> idling equipment.

Investors will be watching for shale productivity updates. Last quarter, Concho Resources' <CXO.N> stock plunged 22% in a day after cutting its production outlook, blaming well designs that hurt output.



Concho is expected to report earnings of 69 cents per share for the quarter, down from $1.42 a year ago. Top U.S. independent Conoco is expected to post earnings per share of 75 cents, compared with $1.36 a year ago, according to IBES data from Refinitiv.

U.S. oil companies have flooded the market with crude this year, capping prices at about the mid-$50 a barrel range. Oil production averaged 11.8 million barrels per day (bpd) in July, the latest monthly figure, up 915,000 bpd from the same period last year, according to U.S. government figures.

"We will continue to see growth, but it will be decelerated, and meaningfully decelerated from where it has been for the last three years," said Bobby Tudor, chairman of Tudor, Pickering, Holt & Co, in an interview this month on the sidelines of a conference. He based the forecast on U.S. oil at about $50 a barrel.

U.S. oil output is projected to rise by 900,000 bpd next year to 13.2 million bpd, down from a gain of 1.3 million bpd day this year, according to a U.S. Energy Information Administration forecast.

With prices in the mid-50s, top shale-service provider Halliburton last week warned U.S. customer activity would continue to decline this year, and outlined plans for a new round of cost cuts.



Halliburton and other hydraulic fracturing providers have taken 100 U.S. fracking fleets that complete oil and gas wells off the market, "with a portion of that to never return," consultancy Primary Vision wrote last week.

"We expect 2020 (spending) plans to be focused around maintenance capital," or spending that supports existing output, said Bernadette Johnson, vice president of market intelligence at consultancy Enverus.

Among major shale producers, EOG Resources <EOG.N> is forecast to report per share earnings of $1.13, down from $1.75 a year earlier. Pioneer Natural Resources Co <PXD.N> could post earnings of $1.98 per share, down 9 cents, according to Refinitiv IBES.

Continental Resources <CLR.N> is projected to earn 47 cents per share, down from 90 cents a year earlier. Its shares have fallen to about $29.16 from roughly $54.15 a year ago.

"People are ignoring shale names now and they're sort of disgusted with them almost," said Rohan Murphy, an analyst with Allianz Global Investors in London, adding that their push for capital discipline came "almost a bit too late."


Graphic: U.S. oil producers' shares fall even as output continues to rise,

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(Bloomberg) -- Oil bulls are rebuilding their positions, but it will probably take some major news to shake the market out of its current mood and trigger a sustained rally.

Money managers boosted their net-long position on West Texas Intermediate crude for the first time since mid-September in the week ended Oct. 22, data released Friday show. Those bets are still at half the level they reached last month, though, while short-selling wagers have tripled in that period.

That signals there’s still a lot of skepticism in the market, despite crude’s 5.4% gain last week. But it also shows there’s growing support for a meaningful rally once short-sellers start unwinding their positions. It’s just that they don’t seem to have a reason to do that yet.

“We had some events recently that were unusual, including the unprecedented attacks on Saudi Arabia,” said Stewart Glickman, an analyst at CFRA Research Inc. “The market saw a quick uptick but then shrugged it off a bit pretty quickly.”

Last week was marked by news of a decline in U.S. crude stockpiles, a brief shutdown of a critical pipeline and signs of progress on U.S.-China trade talks. The market has seen similar pieces of bullish news over the past few months that weren’t enough to dispel uncertainty over demand in the face of growing supplies.

“Every other day, it seems like we get a new statement from the [Trump] administration related to the trade talks,” said Gene McGillian, manager of market research at Tradition Energy. “We’ve gone down this road too many times.”

Money managers’ WTI net-long position, or the difference between bullish and bearish bets, rose 8.5% to 93,856 futures and options, according to U.S. Commodity Futures Trading Commission data. That compares with more than 200,000 about a month ago.

Long-only bets rose 9.3%, while short positions climbed 10%. Short-selling is near a peak reached in January, before massive short covering through the end of April helped support crude’s rally during the first four months of the year.

Other Positions

Net-bullish wagers on Brent crude rose 2.7%

The U.S. gasoline net-long position increased 6.8%

The net-long position on U.S. diesel surged 175%

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Democrats' fracking ban proposal already having impact on US energy investment


The 2020 fight over energy policy is just getting started, and investors already have a bad case of heartburn over Democratic presidential candidates' proposals to ban all fracking in the US


Campaign trail promises to ban fracking, end leasing on federal lands and bring back restrictions on US oil and gas exports.




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