Q2 results lead companies to focus on efficiencies
After poor second quarter results, companies are now focused on cutting costs and improving efficiency
The oil industry’s second quarter results were as dire as expected, although companies with refineries enjoyed some relief. Eni’s standard refining margin rebounded strongly from the year, up threefold reflecting lower crude oil feedstock prices, the short-term impact of capacity shutdowns in Europe and a shortage of products in certain areas reflecting refineries downtime. But “structural headwinds” still affect the European refining sector, the Italian producer said: sluggish demand, overcapacity and rising competitive pressure from cheaper streams of products imported from Russia, Asia and the US.
And Total reported a three-fold increase in its refining business, where adjusted operating income rose from $401m to $1.35bn, year on year, while its upstream earnings fell from $3.05bn to $1.56bn in the quarter.
Most of the majors came out with statements about the need to sharpen their focus on costs, lower debt gearing and greater simplicity bringing greater efficiency. This has been Shell’s stated objective since it announced its plan to buy BG Group – a deal which is going through the regulatory hurdles now. It still needs one approval from China and two from Australia.
Part of the oversupply comes from projects that were sanctioned at a time of higher prices and are only now coming on stream, too late to be halted. Statoil for instance produced 4% more in Q2 15 than in the same period last year, with Norwegian continental shelf ouput up 7%. Outside Norway and allowing for the sale of its Shah Deniz stake, production rose 4%. Statoil was not alone. French Total reported a 12% increase in output.
Collectively, hundreds of billions of dollars of capital expenditure have been postponed this year, creating a big hole in the supply picture that will affect the market in four or five years. But this is not enough to stave off financial disaster now, and so the oilfield service companies are next in the firing-line, facing price cuts of 30%. Strategically, they have to find what accommodation they can, since all their clients are in the same difficult position. And unlike their clients, they have no production to hedge against falling prices.
The low oil price has therefore fed back into greatly revised prices being paid for goods and services, and the service sector has nowhere to go, apart from the courts. Write-downs have led to restructuring.
Halliburton and Baker Hughes were first off the mark with their merger plan, announced last December. It anticipated the merger on the other side of the market, between Shell and BG announced in March, in another apparently mutually satisfactory arrangement to weather the storm of low commodity prices.
The earlier announcement sees the second and third largest in their field hoping to become a single entity by 1 December 2015 creating a $38bn company. Nevertheless, over the first six months of the year, Halliburton reported a net loss of $589m, including impairments of $1.514bn. There were none recorded last year and in the same period last year it made a profit of $1.396bn.
The two are still in talks with the US Department of Justice, the European Commission, and other competition enforcement agencies. Halliburton is marketing its two businesses relating to drilling equipment and services but it does not know whether this will be adequate to meet anti-trust concerns.
It is still planning to sell off others too, although no more than were envisaged at the time of the acquisition, when it announced disposals of businesses with revenues totalling $7.5bn, if required by competition authorities.
So far, it says there is no agreement to date with any competition enforcement authority as to the adequacy of that or any alternative proposal.
French engineering firm Technip announced a range of defensive measures. It said the trends had worsened over the two months before the announcement in July, with “irrational behaviour in bidding on some of the projects that are being sanctioned” and “negotiations have been protracted on contract changes and variations.” It said that some projects might only be restarted after litigation.
In response it is restructuring the company, with the loss of 6,000 jobs from its 38,000-plus workforce globally; and reducing its fleet from 36 vessels at the end of 2013 to 23. It has set aside €650m for one-off charges to cover all of the measures intended to see it through the downturn, such as asset impairments, lease overhangs and additional amounts on ongoing projects that have been affected by the restructuring.
Regions affected include Europe where the number of projects has halved; and it cited disputes over two refinery projects, in Algeria and Brazil, as likely to take time and money to settle. However, where it has first-mover advantage – such as floating LNG where it has two projects under way totalling 4.8m t/y capacity – it is going to reinforce its investment.
Its FLNG business, where it has worked with South Korean Samsung Heavy Industries, had, only three days before the restructuring announcement, won two major contracts. First came the front-end engineering and design work for Woodside’s three-part Browse FLNG project.
The work will take into account the different gas composition and other factors specific to each of the three fields: Torosa, Calliance and Brecknock.
Conditional on that progressing to a positive final investment decision, it will then perform the engineering, procurement, construction and installation of the three FLNG units. These will be anchored some 425km north of Broome, western Australia.
The world’s largest oil services company Schlumberger, announced on 17 July second-quarter results that were dismal but it is eyeing an improvement next year.
Revenues of $9bn were down by a quarter from the same period in 2014, before the oil price crashed, with North America now accounting for the bulk of its problems as companies suspend drilling programmes.
Significant cuts in customers’ budgets are expected to ease though as it sees a tightening of the oil supply-demand balance in the coming quarters, which will feed through into higher upstream spending next year.
Despite that, the results were well received by analysts, who thought the company was at least in a stronger position than its peers to weather the rest of the downturn.
Its chief executive Paal Kibsgaard said there would probably be an improvement in development and exploration activity next year, following higher oil prices.
Having already spent some $500m in the first half of this year on severance pay – Schlumberger said goodbye to 11,000 staff in the first quarter – and a similar sum propping up its share price, it said it was in a good position for the third quarter. But it expects another sequential decrease of 5% or so. A slow-down in the Middle East and the usual North Sea maintenance period will limit earnings.
Schlumberger took a heavy hit with the drop in land rigs in North America and although it hopes the market is now bottoming out, it still sees massive over-capacity and so little or no improvement in prices. Its North American revenue was down 40% on the year, while international revenue was down 20%.
Elsewhere, Russia and central Asian business was brisk, Argentina resilient and it suffered from customer cutbacks in Australia and Malaysia. Kibsgaard said on a conference call that the results were sustainable and not “a fluke” but warned that conditions remained tough.
Italian engineering firm Saipem also complained in its first half of “a declining oil-price trend which shows no sign of reversing”. Its clients are focused on cost reduction, leading to a more rigid approach to negotiations, constant pressure on supply-chain margins, delays in new contract awards, and in some cases to the cancellation of already-approved projects. It expects to make a loss of €800mn this year.
Saipem wrote down €929m in net current and capital assets, affecting the results and the guidance for the full year. Of that, net current assets amounted to €718m, mainly as a result of harder bargaining with customers – both regarding existing issues and new circumstances that emerged or deteriorated during the second quarter of 2015 – in addition to the write-off of a portion of overdue receivables from Venezuela as the currency weakened.
Write-downs in capital assets amounted to €211m and related to the disposal of vessels that cannot be utilized to carry out projects in the backlog, and to the reduced utilisation of logistics bases affected by re-scheduling and/or cancellation of projects by clients. For example, Statoil suspended the Scarabeo 5 for about seven months, from when it completes drilling a well on the Kristin field in August until the middle of March. That cost Saipem another $24m.
More serious though was Gazprom’s cancellation of the South Stream contract, which it valued at €1.232bn, although this was not to do with the oil price but politics.
To maximise its competitive capabilities and create value in this new market scenario, Saipem has launched a turnaround and cost-cutting programme which will achieve savings of €1.3bn over the period 2015-2017.
This involves refocusing on higher-value areas and businesses, meaning a cut in activity in Canada and Brazil and the loss of five vessels that are no longer viable. Furthermore, Saipem is reviewing its organization, expected to lead to a workforce cut of some 8,800 people between 2015 and 2017. This year’s capital investments are now forecast at below €600m.