It’s been a tough Christmas New Year period for the oil and gas sector – following on from the tough past year for miners.
Miners large and small have been scrapping projects, slashing jobs, spending and looking for every cost cut, and write down asset values (with more to come in the next few months, especially from major gold companies, Barrick, Newmont and GoldCorp).
Now its oil and gas’s turn and the past six weeks or so have seen billions of dollars of spending on oil and petrochemicals projects has been scrapped or put on hold.
Royal Dutch Shell, BP, Woodside Petroleum and UK-based companies, Premier Oil and Tullow among the latest of a growing list of companies around the world hacking into spending and costs to try and combat the brutal fall in oil prices, especially in the past month.
Billions of dollars in write downs, impairments and restructuring costs have already been revealed by a growing group of energy companies, large and small, and the total will rise as the 4th quarter reporting season gets underway around the world.
Earlier this month, Moody’s rating agency warned:
“The global oil and gas industry is entering a challenging 2015 based on stubbornly low oil prices.
"Among players exploration and production (E&P) companies will be hit first, while oilfield services (OFS) and midstream energy operators will feel the knock-on effects of reduced capital spending in the E&P sector.
“Offshore contract drillers are likely to have their toughest year since 2009, and integrated oil majors are the best positioned to react to lower prices.”
We are now seeing some of those forecasts come to fruition, in a series of announcements from some of the world’s major oil and gas companies and their suppliers.
For instance, Schlumberger, the world’s biggest oil services company, says it will chop 9,000 jobs, or 7% or its global work force, and took a $US1.77 billion charge in the 4th quarter as a result of the fall in oil price plunge and subsequent spending cuts by many of its customers.
That doesn’t bode well for WorleyParsons, our biggest oil services group, which has already cut 1,500 jobs in the past 18 months or so.
With the 4th quarter (or interim) reporting season about to kick off overseas and in Australia, many of these companies will increase the size of their already large cuts, while others will confirm a range of measures aimed at cutting both operating costs and the cost of exploring and developing projects.
Many companies, especially in the exploration equipment area, will be revealing another round of cuts in coming months.
For example the huge driller, Transocean has already revealed write downs and other losses of $US2.8 billion.
Competitors such as Seadrill and Diamond Offshore have taken losses/and/or suspended dividends and made other cost cuts.
For Australian investors, the company to watch will be BHP Billiton, which releases its December quarter and half year operational and production report on Wednesday where there may be some commentary on the question of asset values and spending for the company’s oil and gas business, especially in the US shale sector.
Last Thursday BP confirmed it will sack 300 people from its 3,5000 strong North Sea work force in Scotland as part of its plan to cut at least $US1 billion in costs this year. It has also halved contractor payments and cut other employee payments.
And UK independent, Tullow also said last week it was chopping $US2.7 billion of asset values and costs in a clean up of its balance sheet.
In Australia, Woodside has already revealed plans to impair asset values of around $A400 million, and said last week it would tell the market in February more and provide an updated figure for the cost cut targets and the write-downs.
"With lower oil prices we are assessing the impact on near-term profitability and future cash flows and revising investment expenditure accordingly," Woodside said in its quarterly report.
It also reported a step backwards at its Browse floating LNG project in Western Australia, saying a joint marketing agreement for LNG signed in 2012 with project partners Mitsui and Mitsubishi of Japan had been terminated.
A day earlier Royal Dutch Shell revealed it had abandoned plans for one of the world’s biggest petrochemical plants, the $US 6.5 billion project with Qatar Petroleum. Shell blamed “the current economic climate prevailing in the energy industry”.
It is also said it cutting 3,000 jobs and spending in its Canadian tar sands operations and associated businesses.
Shell started cutting well before the drop in oil prices started mid year – it has already chopped tens of millions of dollars from spending and over heads, and has sold or plans to sell $US12 billion of assets – although doing that in the current market will be tough.
Shell’s move came as Premier said it would delay a final decision on whether to proceed with a $US2 billion project off the Falkland Islands in the South Atlantic until oil prices had recovered.
Premier also cut rates of pay for contractors and other freelance workers engaged in projects in North Sea and southeast Asia and is attempting to renegotiate deals with suppliers to trim operating costs.
It is not alone in doing that – practically every major energy group is slashing contractors and other variable wage costs at the moment, and those contracting companies are following suit with their own employees and contractors. Watch the likes of WorleyParsons in Australia for more news of revenue and contract cuts when it reports next month.
As well, the giant Norwegian energy group, Statoil had returned handed three exploration licences on the west coast of Greenland, an area considered one of the highest-cost frontiers in the industry, because of the costs involved in exploring the areas.
US giants, Chevron and ConocoPhillips have also revealed big cost cuts and reductions in exploration and drilling plans.
In Australia Santos has chopped around $A700 million from 2015 development costs and exploration charges.
In a further example of spending cuts Canadian Natural Resources, which operates in Western Canada, the North Sea and offshore West Africa, this week reduced its capital expenditure forecast for this year from $C8.6 billion to $C6.2 billion, a drop of 28% and will achieve much of it through cuts to its exploration and development programs, especially in its tar sands businesses, where new projects will be delayed or deferred.
Suncor, Canada’s biggest oil company, this week cut 1,000 jobs and $C1 billion from its 2015 spending program – a drop of 13%.
In early December Conoco said it was cutting its capex program for 2015 to around $US13.5 billion from the previous estimate of $16 billion, a drop of around 20%. Analysts expect the company to reveal more cuts next month because of the further slide in prices.
Much of the cuts will fall on its shale drilling programs in the US, with the company aiming to lower costs by around 23% to $US5 billion this year, an estimate which remains under pressure.
Chevron will update the market next month on its planned cuts after telling investors in early December it was postponing its budgeting for this year because of the plunging oil price. They will be global, and in the billions of dollars.
Analysts reckon the company will cut its existing $US40 billion plan by around $US5 billion, but steeper cuts wouldn’t surprise given the fall in oil prices in the past month, with a number of project deferments also confirmed.
Tullow Oil, which focuses on Africa, said last week it is looking at non-cash exploration write-offs of $US1.2 billion, asset impairment charges of $US1.1 billion and cut capex to $US1.9 billion, including chopping exploration to around $US200 million this year from $US1 billion annually in the last two years.
Showing the impact of the fall in oil prices in the final six months of 2014, Tullow says revenues for last year will be down more than 16% to around $US2.2 billion, from $US2.6 billion in 2013.
But gross profit will more than halve to $US600 million from $US1.4 billion in 2013, which reveals the true impact of the oil price slump. It won’t be alone.
