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Oil stocks punished on Saudi/Russia impasse

Our updated views on affected companies after oil goes below $30 a barrel
March 9, 2020

Saudi Arabia stuck the knife into companies already suffering the financial impact of Covid-19 by dramatically dropping oil prices, after Russia would not agree to a supply cut at an Organization of Petroleum Exporting Countries (Opec) meeting. Russia is not a member but needed to sign off on a 1.5m barrels of oil per day cut by the cartel. 

Oil prices plummeted 30 per cent in response, with Brent crude and WTI settling in the mid-$30 (£23) per barrel (bbl) range at the time of publication. Both Royal Dutch Shell (RDSB) and BP (BP.) fell 18 per cent shortly after opening on Monday 9 March, while the FTSE 350 Supersector Oil & Gas index was down 21 per cent. 

The pain looks set to continue after Saudi Arabia increased oil production. In a statement to the Tadawul stock exchange on 11 March, Saudi Aramco said the energy ministry had issued a directive for the company to “increase its maximum sustainable capacity” from 12m barrels of oil per day (bopd) to 13m bopd. 

Panmure Gordon analyst Colin Smith said the initial Saudi decision was “astonishing” because of how close it had been to balancing the market at the Opec meeting, and the $7 price differential cut – making its own oil cheaper – suggested the country was “shaping up for a full-scale oil price war”. This was borne out by the energy ministry’s directive, which Mr Smith said would push oil prices down even further. 

Outside the supermajors, Premier Oil (PMO) had the biggest fall on the London Stock Exchange on 9 March, coming down 61 per cent to 31p. The company is in the midst of a $500m equity raise, and was trading over 100p in February. Kosmos Energy fell 48 per cent and has remained around the 90p level. Tullow Oil (TLW) was also a big loser, coming down 46 per cent to 10p initially before recovering to 16.5p, and services company Hunting (HTG) lost 20 per cent. Hunting’s exposure to the US shale industry is behind its fall, with Mr Smith saying last time oil prices got below $30/bbl, it was those producers that felt it most. Last week, Hunting reported an 8 percentage point fall in its US onshore division’s operating margin because of the sector’s 2019 weakness. Jadestone Energy (JSE), which had promised a maiden dividend this year, was down 17 per cent. Stifel highlighted the Montara owner’s “hedging, net cash and substantial undrawn debt” as a positive. The company said it would be operating cash flow positive at prices even below $30/bbl because half of Montara’s production is hedged at $68.45/bbl, and it had most recently received a $7.60/bbl premium at Montara and a $21/bbl premium at the Stag operation on top of brent crude pricing.  

Nordea analyst Sebastien Galy said there would be a “credit crisis” for oil sands companies and frackers in the US. While companies were down across the energy space, gas producers escaped the worst of it. Diversified Gas and Oil (DGOC) was down just 2 per cent. Chief executive Rusty Hutson told us the Saudi move could boost natural gas prices as Permian operators cut spending and see plenty of companies try and sell assets. 

“In the 19 years that I've been in the business, I have not seen the level of distress, the assets that are being floated around for divestment from companies,” he said. “[There will likely be] a lot of bankrupt companies, especially if this oil price stays down very long.” DGO operates in the Appalachian basin, not the Permian. 

Fellow gas company Energean (ENOG) was not as lucky, its share price dropping almost 30 per cent between 9 March and 11 March, despite its valuation being based on future, fixed-price gas production. Stifel analyst Robin Haworth said its Edison acquisition, initially expected to be done by the end of 2019 and now forecast to complete by 30 June, could be “pushed out until [there are] better market conditions rather than abandoned”.