Producers have cut costs, sold assets and canceled projects to repair balance sheets following crude’s 2014-17 slump. Now a renewed price plunge and a darkening outlook in the face of an all-out price war is threatening to sweep aside much of that work.
Crude’s slide on Monday wiped about $250 billion off oil company valuations worldwide, after $135 billion was lost on Friday as Russia and Saudi Arabia failed to agree on production cuts. Saudi Aramco, the world’s biggest oil producer, dropped below its IPO price from the first time, while Royal Dutch Shell Plc, BP Plc, and Total SA all fell the most since at least the late 1980s. On the MSCI ACWI Energy Sector Index, average company valuations sank to the lowest level since 2013, with the price-to-estimated-earnings ratio near a 40 per cent discount to the five-year average valuation.
Russia’s refusal to back further OPEC+ production cuts is aimed at weakening competition from US shale. Yet, while the oil-price plunge toward $30 a barrel could potentially put higher-cost shale companies out of business, it also creates huge problems for the biggest global producers. BP, for example, is seeking to push its break-even oil price down to $40 a barrel by 2021, while Equinor ASA says it has a price of less than $50 a barrel — insufficient to drive profit growth if crude’s slump persists.
Shell’s break-even for projects approved in 2019 was under $30 and Total’s “organic pre-dividend” cash break-even is below $25, but large debts could see that breathing space vanish. Analysts at Redburn expect break-evens to be elevated this year as the market languishes. That has cast doubt on the sustainability of the dividend. Shell and BP are among the world’s biggest dividend payers, with bosses vowing to prioritise the payout above everything else. But with the price war brewing, investors are starting to question whether that commitment can last.
While Big Oil has much to lose amid the price war, it’s the standalone exploration and production companies, as well as oilfield-service providers, that’ll be hit the hardest, Redburn analysts wrote in a report. Bonds issued by Vallourec SA and Saipem SpA sank to record lows, while E&P shares dropped on fears that Europe’s most indebted oil firms could be pushed to the brink.
Premier Oil Plc stock lost as much as 84 per cent, while Tullow Oil Plc declined as much as 57 per cent on speculation they may have a tougher time persuading bankers to keep extending credit.