with Paulina Firozi
“The rich are going to get richer,” said John Kilduff, a partner with Again Capital, an oil-trading hedge fund. “The Exxons and Chevrons will pick up more assets.”
Nearly every oil company is hurting due to the pandemic. But the largest are best positioned to emerge stronger from the downturn.
The drop in people driving and flying during the viral outbreak has brought many already struggling oil companies to the brink of going belly up.
Small and midsize companies working mainly in the Permian Basin and other shale patches have been hit the hardest by the drop in prices. Getting shale oil out of the ground is generally more costly than tapping for other petroleum.
Even before the pandemic, the shale-oil sector saw lending dry up as banks and private investors lost confidence in those companies turning a profit. “They were already in trouble,” Kilduff said.
The oil giants, meanwhile, have wells around the world and the cash on hand to weather the turmoil.
As some small to midsize producers seeking Chapter 11 bankruptcy protection start to liquidate, oil giants may be able to buy their assets at bargain prices.
Already at least one giant, Chevron, says it is keeping an eye out for potential acquisitions.
“Certainly there are stresses on the various players in the industry today that could result in commercial opportunities, and we are alert to that,” chief executive Mike Wirth said at the company’s annual shareholders meeting, held virtually due to the pandemic.
“If we see something that makes good sense for our shareholders,” he added, “we certainly will consider it.”
A handful of firms, including the Denver-based shale player Whiting Petroleum and the Houston-based ocean operator Diamond Offshore Drilling, have already filed for bankruptcy.
Others, such as hydraulic fracturing pioneer Chesapeake Energy in Oklahoma, are widely thought to be headed toward Chapter 11 protection, too.
Somewhere between 150 and 200 oil companies are expected to go bankrupt next year if the price of West Texas Intermediate, a U.S. oil benchmark, persists around $30 per barrel, according to the analytics firm Rystad Energy.
The oil industry saw consolidations during past price downturns.
Ebbs in the price of oil helped trigger waves of mergers and acquisitions during the mid-1980s and late 1990s as oil executives sought to reduce overhead costs.
It was around the turn of the millennium when Exxon and Mobil combined in 1999 to form what is today the largest U.S. oil company, ExxonMobil. Two years later, Chevron bought Texaco to eventually become the country’s second-largest petroleum producer.
This year, the price of oil cratered from around $61 at the start of 2020 to about $37 this week as demand for energy dried up. It briefly plummeted below $0 during the worst of the outbreak.
That precipitous drop, according to the management consulting firm McKinsey, will result in the onshore oil sector to “consolidate very significantly.”
But the wild swings in prices could spook some buyers and sellers of wells and other assets from making deals until markets settle. “Volatility is bad for commerce in almost every context, including this one,” said Kevin Book, managing director at ClearView Energy Partners.
For now, those oil giants are not being spared short-term pain.
In their first earnings reports since the start of the pandemic, three of the four biggest U.S. oil and gas producers posted multimillion- to multibillion-dollar losses.
The $610 million hit that ExxonMobil took during the first three months of 2020 was the company’s first quarterly loss in decades.
Both ExxonMobil and Chevron said they will pull back on capital spending this year — down to $23 billion and $14 billion, respectively — in response to the changing market conditions.
Even though the oil majors are in an austere mood, “when they see a good price, they’re going to take it,” Book said.
The Trump administration is trying to help oil companies of all sizes, but the biggest ones say they don’t need it.
The American Petroleum Institute, the most powerful oil lobbying group in Washington, says it is not asking the federal government for a bailout.
It has fought against unsuccessful efforts by some Republican senators to tariff foreign crude and by Texas regulators to impose production quotas. Either move would have helped prop up smaller, ailing domestic producers.
The Federal Reserve is preparing to offer a lending lifeline to businesses with up to either 15,000 employees or $5 billion in annual revenue — a program that may save some small to midsize oil companies.
Even so, “companies have to be creditworthy” to get the Fed-backed money, said Book — and many shale players are heavily indebted.
Despite the administration's efforts, President Trump’s top energy deputy acknowledges not every company is going to make it.
“I think it’s fair to say that you’ll see some of those players go by the wayside,” Energy Secretary Dan Brouillette said in an online interview last month. “They may be purchased by larger players in the marketplace, they may just simply close up shop and go by the wayside.”
“That’s the free market system,” he added. “It’s the way it works here in the United States.”
Coronavirus latest
Automakers are seeing demand recover.
Numerous Detroit automakers are planning to work through the summer to rebuild their inventories as assembly plants reopen following pandemic-fueled shutdowns.
Several companies reported stronger-than-expected sales last month, Reuters reports.
“The University of Michigan’s Surveys of Consumers, closely followed by the auto sector, showed that 64% of those polled in May said it was a good time to buy a car,” per the report. “That was up from 57% in April and the highest level since December. Those saying times were bad or the future was uncertain fell to 28% from 38% the prior month.”
Power plays
Democratic lawmakers are planning to release a green infrastructure package this week.
The much-anticipated infrastructure bill is expected to include a number of items that “will address climate change and safety, which are focal points,” a House Democratic aide told E&E News.
“A central component of the package is the five-year reauthorization of the Fixing America’s Surface Transportation (FAST) Act, which expires on Sept. 30,” the report says. “The rest of the package will be modeled after the $760 billion framework that House Democrats rolled out earlier this year. That measure includes major funding for roads, bridges, ports, airports, drinking water, wastewater, clean energy and broadband.”
The Trump administration tightened sanctions on Venezuela’s oil trade.
It sanctioned four companies allegedly involved in the country’s oil sector in an effort to “cut off the flow of revenue President Nicolás Maduro needs to preserve his power. Targeting the private sector with financial sanctions also helps the administration avoid a military confrontation," the Wall Street journal reports. “…The sanctions block any assets the blacklisted companies might have in the U.S. More importantly, they are designed to spook the international business infrastructure shippers need, such as international insurers, port operators, financiers and traders."
Emails reveal questions about the National Oceanic and Atmospheric Administration’s credibility.
There have been seven sets of records released related to Trump’s erroneous tweet about Hurricane Dorian in 2019, Andrew Freedman reports. The latest release this week shows how NOAA took a hit to its credibility following the incident known as “Sharpie Gate.”
Such an erosion of trust is particularly notable as the agency prepares for the busy hurricane season, which started this month.
“Many of the emails excoriate NOAA’s leaders for issuing an unsigned statement Sept. 6, which backed up an inaccurate assertion from President Trump days earlier that Alabama ‘will most likely be hit (much) harder than anticipate’ by the Category 5 storm,” Freedman writes. “…Based on the emails, sent within a few days of the Sept. 6 NOAA statement on Hurricane Dorian, some coastal residents state that they are less likely to trust NOAA’s hurricane forecasts in the wake of Dorian.”
A tropical storm may approach the United States by this weekend.
Tropical Storm Cristobal, the third-named tropical system of the Atlantic hurricane season, is “expected to slowly intensify in the Gulf of Mexico, with some data suggesting the storm could ultimately approach or even make a U.S. landfall,” Matthew Cappucci reports.
“The system was declared a ‘tropical depression’ on Monday evening and upgraded to a tropical storm at 12:30 p.m. Eastern,” he adds. “This is the earliest third-named storm to form in the Atlantic basin, with the previous record being Tropical Storm Colin, which formed on June 5, 2016.”
Global warming watch
Deforestation of the world’s tropical forests increased in 2019.
“The worldwide total loss of old-growth, or primary, tropical forest — 9.3 million acres, an area nearly the size of Switzerland — was about 3 percent higher than 2018 and the third largest since 2002,” the New York Times reports. “Only 2016 and 2017 were worse, when heat and drought led to record fires and deforestation, especially in Brazil.”
Brazil was responsible for more than a third of last year’s forest loss. The loss of primary tropical forest last year, according to Global Forest Watch researchers, fueled 2 billion tons of carbon dioxide emissions. That’s more than all the emissions released in a typical year from all the vehicles on the road in the United States, according to the report.
And as the pandemic continues to drive an economic slowdown, it could also slow down efforts to enforce anti-deforestation laws, Frances Seymour of the environmental research group World Resources Institute told the Times.
In other news
Prominent animal rights activist Carole Baskin was awarded the zoo previously owned by Joe Exotic.
A judge ruled to give Baskin control of 16 acres of land in Galvin County, Okla., CNN reports. The feud between Baskin, the founder of Big Cat Rescue, and Joseph Allen Maldonado-Passage, a.k.a. Joe Exotic, was detailed in the Netflix hit “Tiger King.” Exotic once ran the Oklahoma zoo that had up to 200 tigers.
The judge ruled that the Greater Wynnewood Development Group, previously owned by Exotic, must “vacate the Zoo Land premises within 120 days of service of this Order. … Vacation of premises shall also require removal of all zoo animals from the Zoo Land.”