Shell & Exxon's Q2 Updates, BP's Divestment & More

It was a week when both oil and natural gas prices settled sharply higher.

On the news front, Royal Dutch Shell and ExxonMobil issued updates on their upcoming Q2 earnings. Meanwhile, BP plc agreed to sell its global petrochemicals business for $5 billion.

Overall, it was a bullish week for the sector. West Texas Intermediate (WTI) crude futures gained 5% to close at $40.65 per barrel – the highest since March – while natural gas prices jumped 12% for the week to finish at 1.73 per million Btu (MMBtu). In particular, the oil markets reversed their loss from the previous week when the commodity recorded a sharp decline.

Coming back to the holiday-shortened week ended Jul 2, the crude benchmark recorded a big increase after a weekly report from the Energy Information Administration ("EIA") revealed that domestic crude stockpiles fell unexpectedly from their record levels. The drop in crude inventories came as refinery runs rose by 193,000 barrels per day and shipments from Saudi Arabia fell with the kingdom reining its production as part of the OPEC+ cuts. On a further positive note, oil at the storage hub in Cushing continued to fall.

Natural gas prices spiked too, on prospects of less associated gas, draining the oversupply amid hopes of rising demand due to warmer temperatures.

Recap of the Week’s Most Important Stories

1. Royal Dutch Shell recently provided an update on second-quarter 2020 guidance, envisioning its post-tax impairment charges between $15 billion and $22 billion. This hefty write-down comes as the coronavirus and associated demand deceleration wipe billions off the oil and natural gas asset value.

Shell’s upstream production is projected between 2,300 and 2,400 thousand barrels of oil equivalent per day (boe/d). The year-ago production was 2,656 thousand boe/d. Further, Shell estimates second-quarter oil product sales in the band of 3,500-4,500 thousand barrels per day. This indicates a 46.8% decrease from the year-earlier reported number due to a dramatic drop in demand stemming from the adverse COVID-19 impact, assuming that the upper end of the estimate will be met.

The company also expects second-quarter LNG liquefaction volumes to contract to 8.1-8.5 million tonnes from its previous year’s quarterly output of 8.66 million tonnes. Moreover, its segmental production is forecast in the 880-910 thousand boe/d band. In the year-earlier period, Shell produced 927 thousand boe/d. Compared with the prior-year quarter, the company expects to incur additional $250-$350 million well write-offs for the ongoing quarter due to tepid macroeconomic outlook. (Coronavirus Takes a Toll on Shell Imposing $15-$22B Write-Offs)

2. ExxonMobil is expected to incur losses in both upstream and downstream businesses in second-quarter 2020 due to continuing headwinds from the coronavirus pandemic.

Upstream operations are expected to take a hit of $2.1-$2.5 billion in the second quarter from first-quarter 2020 due to fall in liquids prices. It will likely bear an additional $400-$600 million brunt of declining gas prices. Energy demand destruction caused by coronavirus-induced lockdowns and global supply glut resulted in a significant commodity price fall in the second quarter.

Profits from the refining business are expected to decline $700-$900 million from the first quarter due to lower margins. Moreover, the company is expected to have a $100-$300 million impact from the North American crude logistics differentials. Notably, the chemicals business is expected to record an operating profit in the range of $400-$600 million compared with first-quarter earnings of $500 million. (ExxonMobil's Upstream to Incur Q2 Loss, Refining to Take a Hit)

3. BP recently agreed to divest the global petrochemicals business to a privately-owned U.K. multinational chemicals company, INEOS. This will be a massive step toward strengthening its finances. BP is expected to receive $5 billion through this divestment.

The company’s petrochemicals business has two sub parts, aromatics and acetyls. The business has 14 manufacturing facilities that are strategically located in the United States, Europe and Asia, which employ more than 1,700 personnel all over the world. Last year, the company produced 9.7 million tons of petrochemicals. The deal provides INEOS with the option of acquiring BP’s Naperville research complex in Illinois for additional consideration. However, BP’s petrochemicals assets at Gelsenkirchen and Mulheim in Germany are excluded from the divestment, which is expected to be completed by the end of this year.

Notably, INEOS had acquired BP’s subsidiary Innovene in 2005 for $9 billion. The transaction included two refineries and the majority of BP’s the then chemical assets. Markedly, the recent move is expected to further strengthen the relationship between the two companies. (BP to Divest Petrochemicals Business to INEOS for $5 Billion)

4. Eni SpA E recently announced offshore gas discovery in the Mediterranean Sea. The discovery has been made in the first exploration well in the North El Hammad concession. The prospect is named Bashrush, located off the coast of Egypt’s Nile Delta.

The integrated energy player believes that the new finding of a single 152-meter-thick gas column in the well has extremely good petrophysical properties. The exploratory well is being tested by Eni for production. To fast-track production activities, the company will also weigh the development options.

Notably, in the North El Hammad license, containing the Bashrush prospect, the Italian energy company holds an operating interest of 37.5%. British energy giant BP plc and France’s TOTAL S.A. have a 37.5% and 25% stake, respectively. (Eni Discovers Gas in Bashrush Prospect, Off the Coast of Egypt)

5. Petrobras PBR recently announced the commencement of oil and natural gas production at its Atapu pre-salt field. The output will be generated using P-70 floating production, storage and offloading (FPSO) platform in the eastern region of the deepwater Santos Basin near the Búzios field, offshore Brazil.

The P-70 FPSO platform has the ability to churn out 150,000 barrels of oil and nearly six million cubic meters of natural gas daily. The unit will operate at a water depth of 2,300 meters and 200 kilometres from the coast of Rio de Janeiro in order to get connected with up to eight producing wells and eight injector wells.

The Atapu shared deposit, which consists of Oeste de Atapu, Atapu fields and a fragment of the country's noncontracted region, is expected to contribute to production growth in the pre-salt. The Atapu field is jointly run by Petrobras (89.257%), Royal Dutch Shell, TOTAL, PetrogalBrasil S.A. and government-owned PPSA. (Petrobras Announces Initiation of Production at Atapu Field)

Price Performance

The following table shows the price movement of some the major oil and gas players over the past week and during the last 6 months.

Company Last Week Last 6 Months

XOM +1.1% -37.8%
CVX +2.1% -26.8%
COP +3.5% -37.2%
OXY +0.5% -60.5%
SLB +3.1% -56%
RIG +3.4% -74.3%
VLO 0.0% -38.5%
MPC +2% -38.1%

The Energy Select Sector SPDR – a popular way to track energy companies – gained 2.3% last week. The best performer was upstream biggie ConocoPhillips COP whose stock was up 3.5%.

But longer-term, over six months, the sector tracker is down 38.7%. Offshore driller Transocean Ltd. (RIG) was the major loser during this period, experiencing a 74.3% price plunge.

What’s Next in the Energy World?

As global oil consumption gradually ticks up, market participants will be closely tracking the regular releases to watch for signs that could further validate a rebound. In this context, the U.S. government statistics on oil and natural gas - one of the few solid indicators that comes out regularly - will be on the energy traders' radar. Data on rig count from energy service firm Baker Hughes, which is a pointer to trends in U.S. crude production, is also closely followed