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“Beware unexplained complexity, lest you confuse it for quality” - Jeremiah Lowin
***Editor’s note: Matt will be in Houston on Wednesday for the SPE-GCS A&D Symposium; if you’re interested in grabbing drinks after, at say ~5:30 to ~8:30, somewhere off of Main St. - shoot over a message via LinkedIn, Twitter, or email [email@example.com]; will post specifics in Tuesday’s newsletter***
Majors / Large Cap E&P Earnings have been coming out for the last ~3x weeks…
…and shares have fallen ~5% - 20% since late Jan.
Considering the wider dispersion of returns that we’ve witnessed over the past year, this round of earnings has been…
**And that’s a good thing**
However, the negative trend is noteworthy.
We believe it’s due to commodity market developments.
So, let’s take a closer look at Crude -
BAML’s Matt Zhao (matty.zhao [at] bofa.com) & Co put out a couple quality notes on Chinese demand:
China Petroleum & Chemical Industry Federation (CPCIF) on China’s private petrochemical producers, only 29% of them can operate at full production as of 12 Feb & 40% are still closed for production…
… CPCIF expects the negative impact on China’s private petchem producers to continue to worsen in the near future.
The common problems they face are:
constrained transport for raw materials and finished products;
product export constraints;
lack of demand from domestic market;
shortage of protective medical equipment, such as gowns, masks and gloves;
lack of working capital
The survey shows many regions are still restricting entry of trucks from other provinces and this affects the petrochemical producers who largely rely on road transport.
JLC [JLC oil analyst Ms. Wang Yanting] believes the COVID-19 outbreak will have a more negative impact on China’s refining sector than that of SARs outbreak in 2003, i.e. oil product output may decline by 30%+ YoY in 2M20, whereas during SARs, China’s output for gasoline, diesel and jet fuel declined by 12%, 11% and 26%, respectively.
Shandong teapots’ runrate dropped to 41% and SOE refineries’ dropped to 72% in mid-Feb, both at the lowest in 3 years…
…JLC’s channel check suggests all SOE refiners will not purchase 3rd party oil product in Feb and prioritize their own production. Some SOE-owned refineries may choose to do maintenance during this period of time.
The good news for E&Ps is that - right now - the supply side of the crude world is messy:
Venezuela declared an Energy Emergency - production has dropped from nearly 3MM bopd in ‘14 to <1MM bopd;
Meanwhile, Iran - under US sanctions - has seen production drop from nearly ~4MMbopd to ~2MM bopd;
40% of Petrobras’s workforce had been on strike (although that wasn’t affecting production); &
“[Khalifa Haftar] also ruled out a truce with “terrorists” and “Turkish invaders”, suggesting a near year-long battle will continue” - Reuters
Really, it’s been a mess for the last 9yrs.
The UAE, Egypt & Russia are backing General Haftar.
We think - with that backing - that he will fight until victory.
Libyan crude production is down 90%, to ~0.1MM bopd, since Haftar’s forces shut down exports, ~1x month ago.
For E&Ps, crude prices could be much worse -
Alix Steel interviewed Parsley’s Matt Gallagher - (skip to the 1:10 mark)
Scott Sheffield is calling for energy investors to sell shares or pull funding from companies that have high rates of gas flaring
Chevron made an attempt at humor… we support the effort:
That’s it for this week - we’ll be back on Tuesday -