Drilling Deeper: Looking offshore

Sector Research: Oil & Gas

Oil rig

For the complete Exane research on the oil and gas sector, click here.

Summary 

Oil, Gas, Macro

  • Brent dropped below $45/barrel this week on further evidence of significant builds in crude stocks.
  • In its latest World Energy Outlook, the IEA lowered its long term oil demand forecasts citing an enhanced global emphasis on cleaner fuels and greater efficiency. The agency expects the market to remain oversupplied until 2020.
  • Saudi Arabia was reported to be looking to raise funds from the bond market in order to cover government spending on the back of the substantial fall in the government’s revenues due to the lower oil price.
  • Petrobras’ workers strike continued as the two parties failed to reach an agreement despite the company’s offer for c.10% wage hike as the union felt that the concerns around investment cuts and asset sales were not addressed.

Integrated Oils

  • Repsol reported Q3 results broadly in-line with market expectations as weakness in Upstream business offset the strong performance by Downstream. Eni announced plans to investment more than $2bn in in Egypt for project development over the next four years.
  • Chevron plans to axe 1,000 jobs in the neutral zone between Saudi Arabia and Kuwait as a dispute between the two countries has ceased work on oil fields for several months. Layoffs may or may not be part of the company’s previous announcement to cut 6,000-7,000 jobs during its Q3 15 earnings release
  • Eni announced its plan to investment more than $2bn in Egypt for project development over the next four years in response to increasing energy needs in Egypt; the company signed a new concession and three amendment agreements for petroleum exploration with Egyptian Govt.

Exploration & Production

  • Anadarko grabbed the main headlines earlier in the week with reports that the company had made an offer for Apache. However, the bid was rejected with talks not set to resume.
  • Africa Oil successfully divested its 50% stake in Kenyan and Ethiopian assets to Maersk Oil in a c. $845mm deal.
  • Tullow Oil released a positive trading update with production and projects announced to be in line with the guidance

Oil Services/ Others

  • Subsea 7 Q3’15 results: The company reported a strong adj. EBITDA of $351m, 40% above the consensus estimates, despite the light revenues and one-off restructuring charges. Backlog of $6.7bn was 1% lower than consensus but included FX impacts, order intake of $1.1bn equates to 0.9x book-to-bill. Subsea 7 guided towards “significant” revenue and margin declines in 2016.
  • PGS raised c.NOK919.6m from private placement of c.21.8m new share (or 9.99% of the company’s previously issued share capital) and 1.8m treasury stocks at a share price of NOK39.    

 

Dollar headwinds

USD and commodities traditionally correlated

The tendency for an inverse relationship between commodity prices and the USD is well known – a stronger dollar increases the end cost of a commodity for consumers in non-USD countries, whilst also lowering the cost curve. The charts below displays the relationship and highlights the potential tailwind of a rising USD.

Dollar Headwinds.png

Fed becoming more bullish on the US economy

With Janet Yellen, at the head of the Fed, becoming more bullish on the US economy as economic indicators continued to improve, a rates rise seems one again set to be sooner rather than later – although we note that we’ve been here before.

EMs exposed? 

With oil demand growth forecast to be based in EMs we wonder whether there is a potential risk that continued dollar appreciation could temper forecast increases in demand. We do not believe that US interest rates will impact EM economies to the same extent they did in the late 90s due to a smaller portion of USD denominated debt this time round. However, we’d consider a rising interest rate environment a headwind. For example consumers in countries which have taken the opportunity of lower oil prices to enact subsidy reforms would be more exposed to any increase in the cost of oil in terms of their local currency.

Still looking for the winner

The logical relative winners should be companies with a high proportion of their cost bases denominated in non-USD. This would include non-US refineries (such as Neste and Saras), which incur other costs in other currencies. However, if the downward pressure on European refining margins which we are currently seeing continues any relative cost benefit would likely be irrelevant.

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