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Is Big Oil Resilient Enough to Tackle the Oil Price Tumble?

Zacks

The entire world prays in desperation to break the jinx of this fast-spreading novel coronavirus outbreak as soon as possible. However, the recovery period seems a long, bumpy ride. The current bleak oil price environment may also subside with prices possibly shooting up as demand rebounds.

The oil and gas exploration and production space is largely driven by the prevalent oil price band, future expectations of oil rates and the wide availability of resources. Steep oil prices generally lead to large investments in upstream operations while lower oil prices can induce a drastic drop in investment.

The pandemic triggered an unprecedented sell-off of the commodity. Particularly, with major cities on lockdown and travel restrictions in place, the consumption for crude is set to take a substantial beating. Global efforts to combat the pandemic’s impact and rev up economic activity have largely failed so far. The virus-inflicted demand slowdown induced a significant oil sell-off, forcing energy players to take a relatively cautious approach to capex programs. While large-cap entities are more poised to regain their credit strength, smaller players are likely to go through a rough patch, especially given the current market crisis.

The coronavirus chaos sent most energy companies into a tizzy. Even the Big Oil companies are not immune to this price crash. Supermajors like ExxonMobil XOM, Royal Dutch Shell RDS.A and Chevron CVX announced steps to "rationalize" their planned capital spending for the current year in response to the sudden oil price slump. The oil giants while suspending share buyback programs intend to generate sufficient free cash flow to maintain steady dividend payouts, thereby preserving shareholder value.


Such has been the plummet in global commodity prices that even dividend safety is under threat. Recently, Norway’s Equinor ASA EQNR cut its dividend, thus becoming the first oil major to reduce payouts amid a sharp oil price plunge in a bid to sustain liquidity. But what sent shockwaves through investors was the decision by Royal Dutch Shell to trim its dividend.

Meanwhile, a recent study by industry consultant Wood Mackenzie examined the resilience of seven oil and gas majors, namely, BP plc. BP, Shell, Chevron, EniSpA E, TOTAL S.A. TOT, Equinor and ExxonMobil. They analysed the majors’ cash margins at Brent $30/barrel and $70/barrel through 2030.

Per the analysis, Chevron and Royal Dutch Shell's upstream portfolios are the most robust at $30/barrel crude while the currently Zacks Rank #3 (Hold) ExxonMobil is least resilient among the seven global oil leaders. Both Chevron and Shell also offer the highest cash margins at $70/barrels and none of the portfolios have much exposure to high-cost assets. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

This is because Chevron and Shell boast a diversified range of assets wherein a major portion of the portfolio comprises more profitable deepwater projects and cash-generative liquefied natural gas (LNG). Chevron’s Gorgon and Wheatstone LNG projects in Australia led to healthy cash margins even with depressed returns and cost overruns.

However, ExxonMobil’s cash margins are at the lower end of all the supermajor entities' range at $30/barrel. Meanwhile, the company is planning to restart the sale of interests in around 40 producing offshore oil and gas fields in the North Sea. The main reason behind ExxonMobil being the least hardy industry participant despite an increasing weighting of deepwater assets is its susceptibility to high-cost, low-margin assets, which are mostly oil sands along with other areas like Alaska.

According to Wood Mackenzie, despite most super majors’ diligent efforts toward streamlining their upstream portfolios for improving resilience, there’s much more left to be accomplished. The impending comeback will require enormous financial and energy resources to rectify the damages caused by COVID-19. During this retrieval process, global oil demand will slowly resume normalcy and may even surpass global supply.

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