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Oil companies suffer Covid-19 crunch

Battle stations for oil and gas as price falls bite
April 8, 2020

Oil and gas companies and investors could be forgiven for believing in US President Donald Trump’s 2 April announcement that he had brokered a 10m barrel of oil per day (bopd) cut to production from Saudi crown prince Mohammed bin Salman and Russia. In an environment where some companies in the sector have lost 50 per cent of their value in the space of a few weeks, optimism is in short supply.

Before both Russia and Saudi Arabia said no agreement had been reached, Brent crude had shot up to $36 (£29) a barrel (bbl), before coming back below $30/bbl. The FTSE 350 oil and gas index also climbed 11 per cent on the news. President Trump does look to have encouraged the Organization of Petroleum Exporting Countries (Opec) and Russia back to the (virtual) negotiating table – but a major supply cut seems unlikely, while consultancy Rystad Energy forecasts a demand drop of 25m bopd in any case, so cuts will help but not solve the price issue. 

Looking ahead, the dividend drivers of the London Stock Exchange, Royal Dutch Shell (RDSB) and BP (BP.), will likely keep payouts going. Both companies will cut spending this year and Shell has taken on $12bn in new debt to keep liquidity high – it has $40bn available, while BP has $32bn.

Shareholders will lose some forecast cash return from Shell because it has paused its share buyback scheme. The risk BP has flagged is a slowdown in payments from its divestment scheme, with the $4bn cash payment for its Alaskan assets the major concern.

On an operational level, the cost-cutting will hit workers and slow supply growth all over the world. Wood Group (WG.) has cancelled its dividend to save cash and is looking for $20m-$25m in spending cuts this year. Fellow services company Weir (WEIR) was trying to sell off its North American business, but will now settle for laying off workers and focusing on its mining business. 

Petrofac (PFC), which operates more in the Middle East and Europe, has cancelled its final dividend of 25.3¢ and says it will cut capital spending by 40 per cent, or $60m, and reduce "overhead and project support costs" by $100m. Its share price is down a quarter from the start of March. 

This is a precarious time for oil and gas companies. Those that can lean back on cheaper production and hedging programmes, gas, or supportive lenders will make it out and the shareholder payouts that keep people interested in the sector will return. We have a buy rating on Weir, hold ratings on Shell and Wood, and sell ratings on BP and Petrofac.

 

See below for our entire FTSE350 review:

FTSE350 profitability: the direction is clear but not the severity

FTSE350 Review: Coronavirus and the dividend dilemma

FTSE350 groups scramble for cash

Aerospace on the descent as defence stays on course

Banks face capital test

Construction hits the brakes once again

Coronavirus threatens electronics and technology

Engineering and industrials braced for a downturn

Few guarantees for financial services

Food and soap in high demand

Coronavirus slams high street doors shut

Home renovations on hold

Insurers stuck between policies and politics

Miners hold on to their hats in Covid rout

Supermarkets thrive but coronavirus harms other personal goods

Oil companies suffer Covid-19 crunch

Pharma giants entering the testing fray

Property income prospects dimmed by Covid-19

Subscription-based models make for sturdy businesses

Downturn threat obscures outlook for outsourcers

Are telcos still a defensive play?

Coronavirus wrecks UK leisure time

Utilities look resilient amid Covid-19 chaos