Tough times ahead for energy sector in coming months

The energy sector, already reeling from a collapse in demand and prices, faces steeper losses ahead as the full impact of business shutdowns and social distancing are felt over the next few months, the nation's biggest oil companies said Friday.

Even as Texas joined 15 other states in starting to reopen its economy Friday, oil and gas companies said they expect demand for petroleum to power cars, trucks and planes will rebound slowly from the unprecedented plunge in energy consumption related to the coronavirus pandemic. For Houston, home to scores of energy companies and tens of thousands energy workers, that could mean more deeper spending cuts, more layoffs and another difficult climb from an oil bust.

“It will take time for businesses to recover and for consumer confidence to return,” Darren Woods, chief executive of Irving-based Exxon Mobil, a major employer Houston, told analysts in a conference call Friday. “It’s going to be a very challenging summer and a sloppy market.”

Global demand for oil — at 100 million barrels per day before the novel coronavirus hit — has plunged 25 percent as consumers around the world hunkered down at home to slow the virus’ spread, leaving cars parked in driveways and planes sitting on tarmacs. U.S. gasoline demand has plummeted by more than 40 percent from a year ago, while inventories are 10 percent above the average for this time of year, the Energy Department said Wednesday. U.S. refineries are operating at 70 percent of their capacity.

The sharp decline in demand has exacerbated the global oil glut, so much so that producers are having trouble finding places to store it. The price of oil has plunged 70 percent since the start of the year, with the impact spreading broadly across the oil and gas industry, hitting producers, refiners and oil field services companies.

U.S. benchmark crude settled Friday at $19.78, well below the $50 and $60 per barrel needed for most U.S. producers to turn a profit.

“The U.S. oil industry, even the global oil industry, can’t work at $15 crude,” Dane Gregoris, senior vice president with Calgary-based RS Energy said. “I don’t think it’s going to be $15 forever, but the real question is can you make it to the other side? The supermajors can, but what shape will they come out?”

Exxon, Chevron and the Houston refiner Phillips 66 on Friday reported wildly divergent earnings during the first quarter, which ended March 31, shortly after oil prices began to collapse and states started imposing stay-at-home orders. The quarter, hit only at the end by the twin shocks, masked the full extent of the pain wrought by the coronavirus.

Exxon Mobil said it lost $610 million in the first quarter, it’s first quarterly loss since the company was formed by the merger of Exxon and Mobil in 1999. Phillips 66, the Houston refining and pipeline company, reported a first-quarter loss of $2.5 billion, compared with a $204 million profit it reported a year ago.

On Thursday, Houston-based ConocoPhillips said it lost $1.7 billion in the first quarter, compared with a $1.8 billion profit a year ago.

Some of the losses could be attributed to billions of dollars in write-downs of the value of businesses in the face of lower prices for crude oil and petroleum products.

Chevron reported earnings of $3.6 billion, a nearly 40 percent jump from the $2.6 billion profit a year ago, but still struck a somber note. The company warned investors to expect depressed financial results in future quarters as long as oil prices remain low.

“I’m an optimist. I believe that the world will return to some post-coronavirus form of normal,” Chevron Chief Executive Mike Wirth told analysts Friday. “That means economic activity, growth and travel. But the pace and pattern at which we re-emerge is open to a wide range of views and I don’t think anybody can predict that.”

Energy companies revised their financial outlook and announced additional cuts to their 2020 capital spending budgets used to fund oil exploration and production. Chevron on Friday said it will cut an additional $2 billion, leaving its capital budget at $14 billion.

Concho Resources, a Midland, Texas-based driller, said it would cut its capital spending 40 percent to $1.6 billion.

Nearly 30,000 pink slips

With oil companies tightening their belts, drilling rig operators are getting pink slips in shale plays across the United States. Some 43 energy companies have disclosed nearly 30,000 so far this year, according to a Houston Chronicle analysis of company filings and state employment notices. The vast majority of publicly announced layoffs are from the oil field services sector.

Tulsa, Okla.-based drilling rig operator Helmerich & Payne on Friday said it decommissioned 37 rigs and laid off 2,800 people across the United States during the first three months of the year.

Helmerich & Payne has 262 rigs remaining in U.S. oil fields but the company’s chief financial officer Mark Smith said he expects to end the third quarter with fewer than 70 rigs in operation.

The frac sand industry is one of the hardest hit in the oilfield service sector. Sand is used in vast quantities in hyrdraulic fracturing, which blasts a high-pressure slurry of sand, water and chemicals into wells to free oil and gas from shale rock.

Houston frac sand company U.S. Silica posted a $72.6 million loss in the first quarter, nearly four times larger than the $19.3 million loss one year earlier. The company has idled seven sand mines and reduced capacity at six more over the past year, resulting in a 75 percent reduction of the company's production capacity, New York investment advisory firm Evercore reported.

U.S. Silica laid off 105 people in Midland last month but the company is not alone. Black Mountain Sand, Covia, Signal Peak Silica and Capital Proppants laid off another 451 people over the past three weeks as they either shut down or scaled back operations in Texas and Oklahoma.

Pipeline companies with available crude oil storage appear to be doing the best in this market environment. Houston pipeline and export terminal operator Enterprise Products Partners recorded a $1.4 billion profit in the first quarter - the highest profit in the company’s 52-year history.

Over the past two months, Enterprise has been switching ethane, propane and butane tanks over to hold crude oil as customers seek to store oil until prices return higher. And with some of the last remaining crude oil storage in the United States, Enterprise is expected to collect some handsome fees.

“We think our storage is worth its weight in gold,” Teague said.

Energy companies said they will wait to see strong and stable demand in oil markets before ramping up production and refining.

Bob Herman, Phillips 66’s executive vice president of refining told analysts: “The last thing we or anybody else wants to do is start a unit up and then shut it down a week later or a couple of weeks later.”

Source: houstonchronicle.com

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