Friday, February 7th, 2020
Happy Friday and welcome to Energized, your weekly look into the geopolitics, news, and happenings of energy markets.
Before diving into this week’s content, we’d like to remind you to join our Energized LinkedIn Group. We will be releasing frequent news and snippets of Energized newsletters through the group. We hope to see you there. Also, if you haven’t already, visit our website to gain access to our free Oil 101 introductory course, our popular series of mobile-ready videos describing “How the industry works.” Ready for more? Check out our in-depth Oil 201 course which covers exploration, drilling, production, well completions, and refining. If your company or group is interested in Oil 101, let’s talk. We license our courses for use as internal training for sales, IT and operations teams. Think you know someone who would enjoy this newsletter? Pass it on! They can subscribe and access our Energized archives here.
Now, onto this week’s issue.
Curated weekly oil and gas newsletter
Oil Prices and Markets
+ Fast Facts – Houston Chronicle “Fuel Fix”
Light, sweet crude (dollars per barrel): $51.63
Last Week: $54.19
Natural Gas (dollars per million British thermal units): $1.84
Last Week: $1.893
Rig count (United States):790
Last Week: 794
Oil and Natural Gas Prices
We got to talk about it again because they keep falling. Oil prices closed at $51.63 on Friday after the Dow Jones Industrial Average had the largest one-day drop since August, partially in response to global coronavirus incidents nearing 10,000. $51.63 is the lowest WTI has been in over one year. Natural gas prices closed at $1.84, which is a three-year low. This issue of Energized will dive into what the supermajors are saying and how they are responding to lower oil and natural gas prices. Stay strong Energized community, we’ll get through this together.
“Independent refineries in China’s eastern Shandong province, who collectively import about a fifth of the country’s crude, have slashed output by 30% to 50% in just over a week as the coronavirus outbreak hit fuel demand and distribution, executives and analysts said.”
This takeaway, alone, is cause for understanding the severe impact the coronavirus is having on the Chinese energy sector. The article goes on to note shrinking gasoline and diesel demand, lower travel rates, and a restriction of commerce in an effort to contain the virus.
“The city of Dongying, home to some 40 teapot refineries, introduced a ban on Friday on vehicles entering the city from outside and asked local manufacturers to apply for special passes to facilitate the logistics required for production.”
“Usually, when OPEC telegraphs that they are cutting production, oil prices spike. But uncertainty about the virus has kept traders in a bearish mindset.”
A great article for market-related coronavirus insight.
+ China oil demand has plunged 20% because of virus lockdown – Houston Chronicle
“Chinese oil demand has dropped by about three million barrels a day, or 20% of total consumption, as the coronavirus squeezes the economy, according to people with inside knowledge of the country’s energy industry.”
A headline is one thing. A bold claim is quite another. The Houston Chronicle shows no shyness in the following claim.
“The drop is probably the largest demand shock the oil market has suffered since the global financial crisis of 2008 to 2009, and the most sudden since the Sept. 11 attacks. It could force the hand of OPEC and its allies, which are considering an emergency meeting to cut production and staunch the decline in prices, which are headed for the lowest close in four months.”
Price losses, commodity stress, the oil market, and more are included in this worthwhile article by the Houston Chronicle.
+ Coronavirus fears weigh on Houston economy as oil prices fall, businesses lose customers – Houston Chronicle
A local account of how Houston is impacted by the Coronavirus. The article is a good case study on how a virus in today’s global economy can have ripple effects across the world.
+ Italy’s oil king fights to preserve his legacy – Wall Street Journal
Most people would guess that, with Guyana, Exxon has discovered the most energy resources.
However, this Wall Street Journal article shows that for the last 10 years Italy’s ENI is far above the other majors in successfully finding oil. From 2014-2018, Exxon is ahead of Shell, but Shell is overall second to Eni in the time period between 2008-2018. That being said, Eni’s shares have underperformed the sector over that same time period.
The chart in the WSJ article is a great look at discovered energy resources in billions of barrels of oil equivalent relative to oil prices from 2008-2018.
Part of Eni’s high discovery quantity is a result of its “willingness to explore in risky places [that] exposed the company and its executives to countries that are known to struggle with corruption.”
Fast forward to today, and CEO Claudio Descalzi is on trial “facing charges that he orchestrated the company’s payment of $1.3 billion for drilling rights in Nigeria with the understanding that most of the money would be paid out in bribes.”
“In the past decade, Eni has discovered almost 14 billion barrels of oil equivalent, more than double its large American and European peers including Shell, ExxonMobil, and BP, according to consulting firm Rystad Energy. In the 10 years through 2018, Eni had a drilling success rate of 45%, about 10 percentage points higher than the industry average, according to consulting firm Wood Mackenzie.”
+ Drilling down: Exxon Mobil aims to keep dominant status in Texas Shale – Houston Chronicle
Alluding to Energized #42 in which we referenced a list (by the Houston Chronicle) of the top Texas drillers of 2019 by permits. Notably, ExxonMobil emerged as the number one driller in 2019 despite being heavily concentrated in the Permian Basin. The Permian made up over 90% of Exxon’s permits. This article follows up on that. “Exxon Mobil was the top driller in Texas after filing for 659 drilling permits in 2019. Early in the new year, the permit filings show Exxon Mobil plans to keep that title.”
Trouble for Big Oil
+ Shell fourth-quarter earnings – Shell
+ Exxon fourth-quarter earnings – Exxon
+ Chevron fourth-quarter earnings – Chevron
“Exxon, which in recent years positioned the Permian as a linchpin of its global growth strategy, on Friday disappointed some analysts by saying output in the world’s biggest shale patch won’t expand in a smooth, uninterrupted fashion. Cash flow failed to cover its dividend for the eighth quarter in the last ten as the company boosted spending on new projects.”
For those of you unfamiliar with the financial structure of majors like Exxon, this is very bad news. Free Cash Flow (FCF), more than revenue or net income, is the best way to understand the financial health of a business. Typically, big-ticket items are depreciated so, from an accounting perspective, the financial burden is spread over the course of several years when in reality the cash was spent today. FCF doesn’t let a company sidestep reality like that, the formula simply being operating free cash flow minus capital expenditures. Positive FCF can be used to pay a company’s dividend and pay down debt. The fact that Exxon’s cash flow failed to cover its dividend for the “eighth quarter in the last ten” suggests that Exxon has to rely on other means to fund its massive dividend, a problem for Exxon’s long-term financial health and a drop in the bucket compared to a falling stock price that is eclipsing the “reparations” the dividend is meant to provide.
Exxon and Chevron’s dividends now yield two-three times a U.S. treasury. Shell’s is closer to 3 times. ExxonMobil’s stock hit a five-year low last Friday. Chevron hit a one year low. So did Shell. Chevron and Shell both slipped to April 2017 levels.
So what’s going on with the oil majors?
According to Reuters, “The world’s largest oil companies invested billions of dollars to boost crude production and their success has turned around and bit them — and their shareholders.”
“The world’s oil-and-gas giants have been hit by falling oil and natural gas prices, weaker margins in chemicals and refining due to sagging demand, and growing investor discontent with their response to a warming planet.”
“To keep investors onboard, oil majors are cutting costs and selling billions of dollars worth of assets around the world to focus on new developments and the most profitable businesses.”
“In the last six months, the broad S&P 500 is up 10.4%, while Chevron shares have lost 8%, Shell is down 10%, and Exxon has lost 12%.”
Well, there you have it. It’s going to take some time for the oil majors to be able to implement their long term strategies. Not the best ending to 2019. It will be interesting to see how the majors adjust this decade, and which strategy proves the best. We’ve mentioned in this newsletter that Exxon is arguably the most committed to a portfolio of fossil fuels, Chevron is somewhat in the middle, and Shell and BP are investing the most in renewables. Looking at Exxon’s stock price, which is suffering more than any other supermajor, maybe a balance of renewables and fossil fuels is the consensus of more than just environmental advocates but investors as well.
+ Transmedia Marketing Program – University of Houston
It’s an honor to work for a company that has a close affiliation with its local community. EKT Interactive is one of those companies, cherishing a strong connection to the Houston community, as well as my alma mater, the University of Houston. Last month, we hosted a lunch and learn for Phil and Karen Snyder, professors at the University of Houston’s Digital Media Program.
If you’re interested in Transmedia, the Transmedia Marketing® certification program is the only program of its kind in the world. The program offers a time saving, online curriculum for adult learners seeking an engaging training experience from which they create projects offering immediate job impact and career value.
For those of you who are new to our community, or are simply unfamiliar with EKT Interactive as a company, EKT Interactive is an oil and gas training company specializing in online learning content for people that are new to the oil and gas industry. This could be anyone from IT, sales, HR, accounting, you name it. Our flagship course, Oil 101, is an introduction to the integrated value chain of upstream, midstream, and downstream. Oil 201 is the follow-up course that expands on those same fundamental topics.
Over the years we have continued to produce new topic-specific content on other topics such as welding, power, and we are just wrapping up our new Refining 201 course. With that, our community has grown to over 11,000 members who stay engaged with our network of podcasts as well as our weekly Energized newsletter which not only discusses the biggest headlines of the week but also gives an ongoing narrative of emerging trends and prevailing themes in the industry.
As far as our relationship to the college of Technology at the University of Houston, our president, Marty Stetzer, has been on the industry advisory board for the digital media program at UH for 8 years. As a member of the board, Marty brings decades of oil and gas industry project planning and e-learning expertise to the videography segment of the program and supports the program with senior projects and internships.
In terms of a mission, EKT is very much so aligned with Phil and Karen’s efforts with the Transmedia Marketing certification program. We are both interested in engaging adult learners and continuing education efforts. I’m grateful we live in a day and age where effective and interactive learning is easy and encouraged.
With that, here are four video links to each of the courses you can sign up to take online if you’re interested in the program. Each 12-week course is $650, or you can sign up for all four courses for $2,400. You will also receive a certificate upon completion of all four courses.
Have a great weekend!
EKT Interactive Managing Editor