U.S. oil prices plummeted below zero for the first time in history earlier this year. Covid-19 destroyed all demand for oil, and environmental activists are campaigning more forcefully than ever before for an energy revolution. Now more than ever, there is an urgent need to reassess the future of the energy sector, and hopefully bring about great changes. This article will allow readers to understand recent, less mainstream, energy sector events, and attempt to illustrate their significance within the sector. The focus will be on oil this week, with my following article for The Student Investor covering the significance of recent renewable energy events.
Quarterly Earnings of Some Major Oil Players
The worst oil crash in decades led analysts to believe that the second quarterly earnings of 2020 for the big three international oil field service companies (Halliburton, Baker Hughes and Schlumberger) would be disastrous. However, the released earnings, although being a shadow of the success seen a year earlier, were better than expected. As such, the overall outlook for oil does not look too negative over the next five-ten years.
Firstly, let us take a look at Halliburton’s earnings. It announced a $2.1bn write-down (reduction in the nominal value of its assets) and a net loss of $1.7bn. However, one piece of positive news seemed to outweigh all the negative - the company’s good cashflow. This positive cashflow has been realised as the pandemic has allowed the firm to shore up its books and cut costs where it can. As such, its share price rose about ten per cent after the earnings update, and over the past week has stayed at a consistent level, showing that the outlook is not all that gloomy.
Similarly, Baker Hughes’ share price rose after Halliburton’s positive earnings announcement on 20 July. Showing that Halliburton’s positive earnings announcement had positive connotations for Baker Hughes, whose share price also rallied on the basis of auspicious investor sentiment. When Baker Hughes’ Q2 earnings were announced on 22 July, its share price stayed flat, despite its revenues decreasing 21 per cent.
Finally, Schlumberger announced its Q2 earnings on 24 July. The world’s biggest oilfield services company announced that it would be cutting 21,000 jobs (a fifth of its workforce) to reduce costs. Furthermore, it announced that revenues were down 58 per cent compared to last year’s Q2 earnings, and that total revenue was down 28 per cent on the previous quarter. However, through the earnings week the company saw a small share price rise. Again, showing that despite a negative long-term outlook for oil, the company is still viable.
From each of these earnings updates, a couple of things stand out. Firstly, the analysts had priced in the negative news previously, shown by Schlumberger’s monthly share price graph above whereby you see a high through earnings week ending 24 July. This is good news as the negative earnings have not come as a surprise to many, and, consequently, investors have not instantly jumped ship. More interesting still, despite the negative news, share prices rose. Speculation about the oil industry over the last few months has led to suggestions that it is on the brink of collapsing. However, if this was truly the case, then the lacklustre earnings results should have surely not led to a positive share price movement. This leads me to believe that oil probably be around for a while longer, and one must not get too optimistic at politicians’ empty promises of net zero carbon in the near future. What is certain is that oil companies will go down fighting.
Chevron to Buy U.S. energy group Noble
In addition, Chevron’s recent $13bn deal to acquire Noble Energy shows that there is still plenty of life left within the sector. Compared to Occidental Petroleum’s $60bn purchase of Anadarko (who have a very similar profile to Noble), the purchase seems a bargain. Therefore, can it be argued that the smaller deal points towards a society where we are less dependent on oil? Perhaps!
Chevron’s CEO, Mr Michael Wirth, has noted that Noble’s emissions intensity (how much pollution is being emitted per GDP spent) is less than that of Chevron’s, pushing the company in the right direction terms of emission targets. Surely, this implies that, despite the recent deal, Chevron, as well as many other major oil players, are shifting towards a future of net zero emissions and providing a robust response to the global climate crisis. Only time will tell whether companies such as Chevron and Total will live up to these targets.
Food for Thought
There is so much going on in the world of oil. The sub-zero price fall in April shocked the world, its rally has been impressive, but its future is far from certain. Oil companies definitely will not fold without a fight. While I’ve attempted to shed light on two less covered oil news stories of late, be sure to keep an eye out for an upcoming article that will paint a broader picture of the current oil market. Do you think oil will continue to reign? Is a clean, carbon-free future a real possibility? Is it still too early for the rise of renewables? Let me know your thoughts in the comments below!