OG BRIEF #9
April 14, 2020
OPEC+ Declares Record Oil Cut
Last OGBRIEF, we broke news on the OPEC+ agreement outline to cut 11 MBPD. Supposedly after much deliberation, including intervention from President Trump, OPEC finally "declared" a record commitment of 23 countries to cut 9.7 MBPD.
The largest ever oil output cut agreed on by OPEC+ ministers is coming without the US mandating curbs on its own crude production.
Many analysts (including myself) offer cautious praise for the deal. According to Time, “The pure size of the cut is unprecedented, but, then again, so is the impact the coronavirus is having on demand,” said Mohammed Ghulam, an energy analyst at Raymond James. Others worry it may not be enough. “This is at least a temporary relief for the energy industry and for the global economy. This industry is too big to be let to fail and the alliance showed responsibility with this agreement,” said Per Magnus Nysveen, the head of analysis at Rystad Energy. “Even though the production cuts are smaller than what the market needed and only postpone the stock building constraints problem, the worst is for now avoided.”
Jeffrey Halley, senior market analyst for Asia Pacific at Oanda, called the agreement "underwhelming,' and noted that non-OPEC+ oil producers, (often termed OPEC++) including the United States, Canada and Norway, have not committed on paper to "actual cuts to production" according to CNN.
To Cut Or Not?
Matt Gallagher, the 37-year old CEO of Parsley Energy, is rallying fellow Texas oil producers to support a mandatory cut in production, a controversial idea in an industry where wildcatters frown at government intervention, and one that has put him at odds with several of the industry’s largest drillers. The Railroad Commission of Texas, which regulates the state’s oil industry, is set to discuss the proposal today. Parsley’s shares have fallen about 62% from the start of the year as oil prices have cratered, compared with a 56% drop for a broad index of U.S. O&G companies. Oil prices have dropped 63% this year. According to the Wall Street Journal, Mr. Gallagher, along with Pioneer Natural Resources CEO Scott Sheffield are working on an effort to persuade Texas regulators to back output cuts. The idea has drawn opposition from larger companies like Exxon Mobil, EOG Resources, and Occidental Petroleum, which have said statewide cuts won’t lift prices and would only disadvantage Texas producers.
First Quarter Earnings Preview
“There is more uncertainty for this quarter than almost any quarter I can remember.”
-Bob Doll, Chief Equity Strategist and Senior Portfolio Manager at Nuveen
Profits among companies in the S&P 500 are projected to drop 21% in the current quarter after sinking 11% in the first three months of the year, according to FactSet estimates. In the second half, profits are expected to continue shrinking, but at a slower pace, falling 9.6% in the third quarter and 1.6% in the fourth.
“We’ve never, ever, ever seen a sudden stop of the economy.”
-Lisa Shalett, Chief investment officer at Morgan Stanley Wealth Management
The pain is projected to be particularly acute among companies in the consumer-discretionary group - a category including hotels, cruise lines and restaurants - where profits are expected to sink 32% from a year earlier, according to Factset.
Meanwhile, earnings among energy companies, hit both by an unprecendented drop in demand and the price war between Saudi Arabia and Russia, are expected to plummet 52%. Both Exxon Mobil Corp. and Chevron Corp. have slashed their capital spending plans in response to the crash in oil prices. Those stocks are off more than 30% in 2020 according to the Wall Street Journal.
One thing is for certain, the Coronavirus outbreak has devastated demand for travel and fuel. This demand shock impacts the oil sector and broad economy in many ways. However, not every company has the same assets, business model, break-even costs, or future development plans.
This is certainly true in the energy sector, and as first quarter earnings are set to kick-off, it will be interesting to hear how executives forecast cost cuts, production guidance, and forward planning.
Stay tuned to first quarter earnings, as management may mention actions to stop the bleeding: large clues to the specific exposure of each individual company's situation.
Especially unique given the fact that balance sheets vary, and the rock from which each company produces oil can vary dramatically, even only miles apart.
"I've been fortunate to work with some of the best and brightest in oil & gas. This industry continues to redefine innovation every day. It's not rocket science, but pretty close - I can't wait to see where we land."
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US Rig Count
Since early March, US upstream operators have been announcing immediate or upcoming cuts to their rig counts. The number of rigs being released has materialized in a significant way, with the US count down more than 200 rigs in the last month, or 26%, as of April 8. In the last year, the active rig count has fallen by 42%. WTI front-month prices settled at $25.09/bbl on April 8, up 24% in the last week, but down 25% in the last month and down 59% YOY. On April 9, OPEC+ agreed to cut 10 MMbo/d in production in May and June, a move aimed at raising prices amid the coronavirus pandemic. Saudi Arabia will reduce its current 12 MMbo/d output by 3.3 MMbo/d, and Russia will trim 2 MMbo/d off its 10.4 MMbo/d production. Beyond June, the consortium will keep 6 MMbo/d off the market until April 2022.