Following the publication of the energy industry’s first quarterly results since the Covid-19 outbreak, a Rystad Energy analysis reveals a surprising contrast. While the oilfield service (OFS) market has taken a massive hit in earnings and profit margins, US shale operators had an impressive quarter under the circumstances, which even ended up in increased dividends.
A preliminary analysis of 204 service companies finds that revenues are down 6% compared to the same period last year, while impairment charges have skyrocketed. Profit margins for January through the end of March 2020 were down by almost 90%, and the top 50 public service companies recorded total net losses exceeding $35 billion – far greater than the quarterly losses incurred during the previous industry crisis five years ago.
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The sectors that have seen the greatest revenue decreases are the usual suspects – well services and land drillers in US shale operations – but offshore project delays are also taking a toll on service revenues. Share prices have been hit hard as well, falling by almost 50% since the beginning of the year, with offshore drillers hit especially hard.
“Although the 6% year-on-year fall in 1Q 2020 revenues appears modest compared to the massive decreases of 30% or more recorded during the last downturn, our analysis indicates that we are witnessing only the beginning. Larger declines are expected in the near term. This is bad news for an industry that still has not fully recovered from the previous crisis,” says Aleksander Erstad, energy service analyst at Rystad Energy.
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The worsening market outlook has forced companies to take record impairment losses and asset write-downs. Not only in the OFS sector, which wrote down billions of dollars worth of assets in the first quarter, but also for E&P operators.
Rystad Energy analyzed the first quarter earnings of a peer group comprising the top 39 public US shale oil producers (excluding majors, gas companies and Anadarko). Due to mergers, bankruptcy and delayed filings, the group shrunk to 35 operators in 4Q19 and to 29 operators in 1Q20.
Despite the worsening market, the sector performed much better than what many expected under the circumstances.
The first quarter of 2020 showed a surplus of more than $1 billion in cash from operations compared to capital spent during the period, even though the number of operators that managed to balance out dropped back to 45%.
“It’s the fourth consecutive quarter of positive cash balancing, and the fourth quarter in the history of the shale industry when companies didn’t overspend. This is actually quite impressive, especially for first-quarter results,” says Alisa Lukash, senior shale analyst at Rystad Energy.
Although shale producers generated their worst-ever net quarterly result – with collective losses reaching $26 billion (against a six-year average net loss of $2.9 billion) – the numbers would be far less ominous if impairments were excluded. The biggest factor pulling results down was the operators’ massive impairment adjustments of $38 billion.
The fair value changes recognized for hedges and derivative financial instruments in the 1Q20 income statements amounted to a positive $9.6 billion, which is the highest since 2014, followed by 4Q14 at $9.5 billion and 4Q19 at $9.2 billion.
Surprisingly, dividend payments grew by almost $50 million for the peer group in 1Q20, as operators displayed an effort to shore up plunging equity prices. The ratio of dividends to capex grew to 6.4% in 1Q20, versus 5.6% in 4Q19.
At the same time, stock buybacks have predominantly been paused as companies are waiting for signs of a structural recovery in commodity prices. Stock repurchases dropped by $400 million in 1Q20 for the shale E&Ps, now accounting for 7% of quarterly capex.
Finally, the updated outlook on the debt and interest by maturity for public US shale oil producers has reached $140 billion in maturity and payments scheduled through 2026. This represents an addition of $7 billion since our update in late March 2020.
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