Financial Times Europe - 10.03.2020

Tuesday10 March 2020 ★ FINANCIAL TIMES 13

and gas companies the new oil price

environment means they could be in

danger of breaching banking covenants

later in the year. North Sea oil producer

Premier Oil as the worst hitw yesterday,

downmorethan53percent.

Analysts pointed to its still significant

debt as well as concerns around plans to

refinance its $2.9bn of lending facilities

and buy $871m-worth of North Sea

assets from BP andKorea National Oil

Corporation.

Amidyesterday’s carnage a few win-

ners did emerge.Frontline, the Norwe-

gian oil tanker group controlled by bil-

lionaireJohn Fredriksen, jumped more

than 8 per cent, while rivalEuronav

advanced 7.4 per cent as charter rates

soared.

With Saudi Arabia now offering

unprecedented price discounts on oil,

forward rates for Very Large Crude Car-

riers, capable of carrying at least 2m

barrelsofcrude,jumpedsharply ester-y

day, hitting $45,000 a day on the route

between Saudi Arabia and the Far East,

compared with a spot rate of $27,900 a

dayonFriday.

Vopak, a Dutch company focused on

oil storage, rose more than 5 per cent

yesterdayastraderssaiditcouldbeabig

beneficiary from increased demand for

storagetanks.

BASF,oneoftheworld’slargestchem-

ical suppliers, said that the weakness in

oil prices leads to a reduction in raw

materials costs and so could “positively

impactearnings”.

The Germany-based company added:

“The extent will depend on how long

these lower oil prices will last as well as

supplyanddemandforchemicals.”

But many companies that use hydro-

carbons as feedstock — traditional win-

ners from a price decline — were not cel-

ebrating. US chemicals producers that

have invested billions of dollars to har-

ness cheap gas from the shale boom risk

losing their cost advantage over foreign

rivalsasaresultoftheoilslump,accord-

ingtoanalysts.

Over the past decade companies such

as Dow and LyondellBasell pledged

morethan$200bntoconstructvastpet-

rochemicals complexes that transform

ethane from fracking wells into the

basic building blocks for materials like

plastics.

The precipitous fall in crude prices

means that the edge they have over

competitors in Europe and Asia that use

oil-derived naphtha could now shrink,

industryobserverssaid.

“The fact that the rest of the world

doesn’t have access to cheap gas has

given the US a competitive advantage,

which has resulted in billions of dollars

of investment focused on exports,” said

Graham Copley, founding partner at the

research consultancy C-MACC. “You

start bringing crude oil price down and

youtakethatopportunityaway.”

Beyond energy groups, shares in lead-

ing US chemical makers were among

notable casualties esterday.y Dow nda

Westlake ach lost one-fifth ande Lyon-

dellBasell as down 14 per cent, com-w

pared with a 7.3 per cent drop in the S&P

500index.

war and last year’s takeover of shale

rivalAnadarko. Oxy took on $40bn last

year to buy Anadarko — a bet on size

and oil prices that was facilitated by

Warren Buffett’sBerkshire Hathaway,

whichprovided$10bnoffinancing.

Neither has come good and shares

havetrendedlowersincethedealclosed

in August. The latest plunge leaves

Oxy’s market capitalisation now barely

above $15bn, compared with more than

$40bnatthetimeofthedeal.

The largestmajors, particularly in

Europe, are not immune. They have

promised their investors they can do it

all — from cutting costs and producing

oil and gas at higher margins to paying

down debt and ramping up shareholder

payouts.Theyarealsounderpressureto

investincleanerenergies.

“International oil companies will now

of a business model dependent on con-

stant spending to the detriment of capi-

talrepayment.

Increasingly clear to investors is that

the model also depended on Opec’s and

Russia’s willingness to keep prices high,

surrendering market share in the proc-

ess.ThatgenerosityendedonFriday.

“If you’re Russia, you don’t want to

bankrupt these shale companies, you

want to turn them into zombies — don’t

let them restructure, leave them debt-

laden with the inability to invest and

inabilitytogrow,”saidMrCurrie.

Heavily indebtedOccidental Petro-

leum, or Oxy, was one of the hardest-hit

of the larger companiesyesterday,

openingdownmorethan40percent.

It was another devastating judgment

from investors of both the company’s

resilience in the face of the coming price

D E R E K B R OW E R , A N J L I R AVA L , N AT H A L I E
T H O M A S , D O N ATO PAO LO M A N C I N I , N E I L
H U M E A N D M I C H A E L P O O L E R

From the shale fields of Texas to deep-
water projects in the North Sea, the
price war launched by Saudi Arabia has
sent shockwaves across theenergy
industry and triggered the biggest sell-
offsincetheglobalfinancialcrisis.
It has left some companies searching
for strategies to protect profits and keep
paying dividends. Others are fighting
forsurvival.
“The price collapse could be the trig-
ger for a new phase of deep industry
restructuring — one that rivals the
changes seen in the late-1990s,” said
Tom Ellacott of the consultancy Wood
Mackenzie. “Sustained prices below
$40abarrelwouldtriggeranewwaveof
brutal cost cutting. More highly lever-
aged players will be forced to make the
deepestcutstostaveoffbankruptcy.”
Nowhere is that more true than in the
shale industry, which helped end US
dependenceonMiddleEasternoil.
Theprice plunge that started on Sun-
daynightleftUSbenchmarkWestTexas
Intermediate trading at just over $30 a
barrelyesterday, well below the break-
evenpriceformostUSshaleoilwells.
Even the best-performing shale pro-
ducers, such asPioneer Natural
Resources nda EOG, suffered share
pricedeclinesofmorethan30percent.
For many in the industry, the new
Russian-led price war will trigger bad
memories of the 18-month-long depres-
sion that followed Saudi Arabia’s deci-
siontoopenthetapsinNovember2014.
“The biggest difference is that these
producersareallinamuchweakerposi-
tion,” said Jeff Currie, global head of
commodities research at Goldman
Sachs.“Theirbalancesheetsareweaker,
theirstockpricesarelower.”
Analysts said dozens of smaller shale
companieswouldnowgobust.
“This is the financial crisis for oil,”
said Ian Nieboer, head of macro
research at RS Energy Group, part of
shale data provider Enverus. “Except
theproducersaren’ttoobigtofail.”
US production hit a record 13.1m bar-
rels per day last month, more than dou-
ble its level before the shale boom took
off in 2010, and may even rise modestly
in the coming weeks as working rigs fin-
ish drilling some wells. Many producers
have also hedged output for 2020, insu-
latingthemfromthepriceshock.
But if current prices persist, activity
will collapse by the end of this year as
producer companies cancel contracts
with oilfield services companies, said
Artem Abramov, head of shale research
at Rystad, bringingwidespread misery
in shale-dependent economies in Texas
andNorthDakota.
Yesterday,Diamondback Energy nda
Parsley Energy, two of the Permian
Basin shale’s leading independent pro-
ducers, said they would pare back the
number of their working rigs and
reducespending.
Yet even before the latest shock, shale
producers’ recent focus on generating
free cash flow has failed to renew their
attraction to lenders, which have tired

COMPANIES

Energy industry feels pain of Saudi price war

Oil’s plunge leaves some operators searching for ways to protect profits while others in areas such as US shale face fight for survival

Chevron

Repsol

Equinor

Tota l

Royal Dutch Shell

Galp

Eni

ExxonMobil

BP

Pioneer Natural Res

EOG Resources

ConocoPhillips

Devon Energy

Concho Resources

Diamondback Energy

Marathon Oil

Canadian Natural Res

Noble Energy

Continental Res

Ovintiv

Apache

Earthstone Energy

Crescent Point

WPX Energy

Seven Generations Energy

Centennial Resource

Parsley Energy

Whitecap Resources

Extraction Oil & Gas

Callon Petroleum

SM Energy

Matador Resources

Oasis Petroleum

Denbury Resources

Aker BP

Lundin Petroleum

  More leverage

Cost per barrel ()

Integrated

Large cap

Small-mid cap

International

E&P

     

     

Range -

Low prices will stretch small cap oil companies

Debt to ebitda based on dierent oil price scenarios,  (X)

Source: RBC Capital Markets

ST E P H E N M O R R I S, R O B S M I T H
A N D R O B E RT A R M ST R O N G

Bank stocks tumbledyesterday as a
crude crashhammered asectorgrap-
pling with coronavirus, tougher regula-
tions and ultra-low interest rates.

The Euro Stoxx Banks Index fell 13 per
cent, while KBW US Bankdropped
11percent.
One of the hardest hit was France’s
Natixis, which dropped 18 per cent as
investors targeted lenders with expo-
sure to the energy sector. Domestic
rivalsSociété GénéraleandCrédit Agri-
colecame under fire, with their shares
falling 18 per cent and 17 per cent
respectively.
“Within the French banks, Natixis
and Crédit Agricole are more exposed to
oil and gas with 5 to 6 per cent of group
credit exposures,” said Kian Abouhos-
sein, an analyst atJPMorgan. “A price
decline this large and quick brings more
harmthangood.”
The turmoil risks lowering company
spending, increasing credit rating
downgrades and defaults, and depress-
ing emerging markets and commodity-
linkedcurrencies.
Natixis madeprovisions late last year
because of its holdings in US natural gas
producers, while funds atH2O, a €30bn
asset manager that it owns, havebeen
badly hit by this month’s turmoil in
markets. ItsMultibonds fund has fallen
19percentoverthepastmonth.
A spokesman for SocGen said the oil
and gas sector only represents about
€20bn of its €326bnexposure to corpo-

rates and added that its shares were

down in line with the sector and French

peers.

Italian lenders werecaught up in the

sell-off after the government imposed a

four-week lockdown f 16m peopleo

across 14 provinces. UniCredit fell 13

per cent and Intesa Sanpaolo lost 12 per

cent in a slump that threatens to under-

minenascent recoveries from a decade

ofpainfulrestructuring.

The lockdown andfallout will make it

harder for companies to service their

debt and could lead to a resurgence in

bad loans that the lenders have worked

foryearstoreduce.

Intesa Sanpaolo ad also justh

launched an unsolicited bid for smaller

rivalUBI Banca, which analysts said

couldbejeopardised.

JPMorgan’s Mr Abouhossein said

mostinternationalbanksshouldbeable

to absorb any losses on their credit

books without impedingability to lend

andpaydividends.

“Prices are down to early 2016

levels when the bottom was in the

mid $20s and European bank losses

were manageable over that period,”

hesaid.

Oil pricesfell 30 per cent to between

$33 to $36 a barrel after Saudi Arabia’s

decision to start a price war with rival

producers.

“Most banks have cut energy expo-

sure dramatically since the last energy

shock and have been tightening under-

writing standards for quite some time,”

said Anton Schutz of Medon Capital,

whomanagesaportfolioofbankstocks.

The pain was not limited to Europe’s

financialsystem.USbanksfacedacross-

the-board selling, with the KBW US

Bank Index falling 11 per cent, its worst

day since 2011, in early afternoon trad-

ing.

JPMorgan ChaseandBank of America

were both down 12 per cent. Regional

banks faredworse, with those exposed

to the energy sector leading the group

down.Cadence Bancorp,Cullen/Frost

Bankers,Texas Capital Bancshares nda

BOK Financial each based in Texas or—

Oklahoma and with close links to the oil

industry — all declined 20 per cent or

more.

There is “unmitigated selling if you

have Texas in your name or energy in

your portfolio,” said Piper Sandler ana-

lyst Brad Milsaps. Whether the sell-off

was justifieddepended on how long

pricesstayed low. “A lot of the [energy]

debtisnotdueforanumberofyears.”

The banking sector isbracing for fur-

ther interest rate cuts after theFed

made its first emergency reduction

sincetheheightofthefinancialcrisis.

The European Central Bank, which

has already slashed rates to a record low

of minus 0.5 per cent, could decide to

cutagain aterthisweek.l

See Markets

Financials

Banking sector suffers severe hit on bourses

Theprice plunge

that started on

Sunday night

left US

benchmark

West Texas

Intermediate

trading at just

over $30 a

barrelyesterday

Nabil al-Jurani/AP

‘This is the

financial

crisis for oil.

Except the

producers

aren’t too

big to fail’

need to consider where they can cut

capital expenditure quickly. The aver-

age break-even in the sector is $55 a bar-

rel ,” said Jason Gammel, analyst at Jef-

feries. “Buybacks and dividend growth

are now almost certainly off the table,”

he said. In fact, the industry is question-

ing which companies will be the first to

cuttheirdividends.

BP ell almost 20 per cent, whilef Shell

dropped 18 per cent.They have the

highestdebtlevelsofthemajors.

Norway’sEquinor nd Italy’sa Eni,

which have bigger exploration and pro-

duction divisions as a proportion of

theiroverallbusinesses,aremoretiedto

the oil price.ExxonMobil n the US,i

meanwhile, has a robust balance sheet

but it is in focus because of a large capi-

talexpenditureprogramme.

For many of the independent UK oil

31 %

Decline for the

Euro Stoxx Banks

Index. KBW US

Bank fell 11%

81 %

Drop for Natixis.

SocGen also fell

18% while Crédit

Agricole fell 17%

MARCH 10 2020 Section:Companies Time: 9/3/2020- 18:33 User:timothy.digby Page Name:CONEWS2, Part,Page,Edition:USA, 13, 1