Archive for August, 2009
The massive earnings decline recently announced by major International Oil Companies (IOCs) around the world may only be part of an unsavory trend. The earnings decline followed weak demand arising from a large supply overhang and a lingering global economic downturn. These companies would normally require a recycle ratio of 100% (to wit, proceeds from sale of one unit of crude oil equal cost of discovery and production of a new unit) just to stay afloat. However a recent report holds that in order to grow reserves, meet dividend commitments and tax provisions, a recycle ratio of 200% would be necessary. The report shows that the ratios for these IOCs have been dipping below this mark and worse still, over the past 10 years, their cash flow growth per barrel (15%) has lagged the compound annual growth (18%) for discovery and development.
One way of addressing this may be by aggressive cost-cutting measures and such may have informed the recent restructuring embarked upon by Royal Dutch Shell and British Petroleum.
Major oil companies around the world announced their Q2 earnings results last week and a litany of losses they were. Royal Dutch Shell posted a 67% loss; ExxonMobil 66%, PetroCanada 95%, BP 53%, Connoco Phillips 76% and Repsol YPF 62%. The causative factor as cited was weak demand which depressed prices. For ExxonMobil it was the third consecutive quarter of y-o-y decline. Shell has embarked on an extensive cost-cutting program which has seen the retrenchment of 150 of its top level management cadre, in order to stem a rising debt profile.
While the oil majors were sustaining earnings losses, crude oil prices doubled between early Q1 and end Q2, and that, without any market fundamental support: the market was massively over-supplied, demand was (and is still) weak and the economic recession did not show credible signs of effective recovery. During the oil price shock of 2008, oil prices were rising steeply while the market was well-supplied and that has been in the main, the case with recent price surges.
These conditions do not admit a quick demand recovery, a point conceded by the Chief Executive Officer of Royal Dutch Shell in his Q2 statement. The much-bandied projections of quick demand recovery and even an impending oil price shock now seem fatuous.
My positions do seem strengthened: in a recent post, l argued that even an increase in energy demand occasioned by a strong economic rebound will not likely translate to a commensurate increase in crude oil demand and that recovery will most likely be very slow. l also proffered that in the unlikely event of an oil price shock following a global economic rebound, such shock is unlikely to bear any market fundamental support.
This article is published in my instablog at Seeking Alpha