OPINION: The scale of financial damage wreaked largely by Covid-19 is well laid out in the oil and gas majors’ second-quarter results.
One report described the US corporate losses as “almost breathtaking”, and it is hard to disagree.
ExxonMobil, historically the money-making king of the sector, failed to generate any operating cash flow.
Chevron ran up an $8 billion loss, paying out $780 million alone for making staff redundant.
Shell ran up an astonishing $18 billion quarterly loss as it took massive write-downs on its Australian gas assets, including its flagship Prelude vessel.
France's Total — with $8 billion worth of write-downs — was saved from further ignominy by its large trading arms.
Buying crude at knockdown prices, storing it and then selling on the value upswing mitigated some losses from upstream and refining businesses.
Big Oil's reputation has taken a pounding, and the collapse in share prices shows investor confidence is low — very low.
Energy used to be the largest sector in the S&P 500 index of leading US shares. That position is now held by tech stocks, which account for more than 27% of the index value, contrasting with energy’s 3%.
The real questions now are: How long will this situation remain, and have we witnessed a permanent structural change?
Well, US oil futures have bounced back from a historic plunge below zero in April to more than $40 per barrel, aided by local American production falling by 20% in May.
Some energy analysts insist it would not take much of an economic bounce back to hasten crude supply shortages and price spikes.
But others fear a second wave of the pandemic and new lockdowns, which would stifle commercial growth and oil demand.
Total says it expects oil prices to remain below $60 per barrel over the next 30 years and sees oil demand peaking in the next 10 years.
Shell sees values remaining below $60 at least until 2023. This compares with the all-time high of $147 just before the 2008 financial crash.
So the market for oil and gas will be difficult, and large operators have high debt levels and need to cut costs.
Companies are shedding staff in large numbers while either freezing or cutting payouts to shareholders.
All eyes are on ExxonMobil to see if it can still grow the dividend when it has just promised to take on no further debt.
Then there is the energy transition and whether this is the best or worst time to change a company’s direction.
We would argue any long-term business model must now properly take into account the Paris climate change goals.
BP said on Tuesday that within 10 years it aims to increase its annual low-carbon investment 10-fold to about $5 billion — while cutting its oil and gas production by at least 1 million barrels per day, or 40%, from 2019 levels.
Shell has said it would soon reveal plans that will “reshape, redesign and resize” to meet a new, low-carbon era.
This week, Shell made yet another small but symbolic acquisition in Select Carbon, which specialises in “carbon farming”.
Many US operators are still dragging their feet — even worse, the World Bank says carbon dioxide pollution from American gas flaring rose 23% last year.
The second-quarter results are indeed breathtaking, but oil companies that take bold steps to reinvent themselves could turn today's crisis into tomorrow's opportunity.
(This is an Upstream opinion article.)