Half year in red for the oil and gas industry

The market volatility and the oil price deadlock to lower areas were seriously felt by the large players in the world, reflected in their financial results of the first two quarters of the year. Heavily troubled in their turn, the oil companies in Central and Eastern Europe (CEE) were however less sensitive to the negative context. These differences were seen in the relatively different developments on the stock exchanges. While the major players are, without exception, on the red territory compared to the market prices from the first half of last year, in Central and Eastern Europe there are some companies that have registered significant growths. For the second half, however, the prospects are not favourable, neither for small regional companies nor for the major players.

After the shock of 2014, when during the second half of the year, oil prices fell by more than 50%, the first half of 2015 has given a breath of fresh air to the oil industry. However, a misleading one! Volatility was high - creating real problems for companies in the field; the problem is even more serious since, although the oil prices remained on average higher than in the first quarter, starting in April (i.e. in the second quarter) it entered on a falling tendency, marking the return to the downward trend started last year. For example, in the first three months of 2015 the Brent oil price - the benchmark for the European market, overcame the USD 50 threshold, to go beyond, for a short period of time, the threshold of USD 60/barrel. WTI - the benchmark for the US market, followed the same pattern, only the values were different (see the chart ‘A breath of fresh air for the industry’). However, since April, both quotations began to descend, reaching levels of USD 38 and USD 42 per barrel respectively by the end of August.

Despite the relatively favourable oil price evolution in the first months, the high volatility and the deadlocked prices in the lowest levels of recent years have laid pressure, unprecedented in the last decade, on the companies’ financial results. At least this is what the Standard & Poor’s (S&P) analysts say, after analyzing the figures reported by some of the most representative global players - namely the three largest oil companies included in the S&P 500 index of the US stock market: according to a study conducted at the beginning of August, the giants Chevron, ExxonMobil and Occidental Petroleum have recorded during April-June 2015 the lowest quarterly profit in the last 10 years; more specifically, the overall profits of the three large US companies in Q2 2015 was of USD 4.9 billion. The lowest value in the last decade - S&P experts say well below than the ones recorded in Q2 2009 when those companies felt the effects of the financial crisis.

The volatility of the oil market and the low oil prices have led thus to serious damages for investors, making companies extremely difficult in adapting in real time to the current context. The damages felt by investors were determined on one hand by the severely reduced profits (or, often, by the companies losses) and, on the other hand, by the fall in prices of the companies’ shares on the stock markets, which have coloured the stock exchange indexes in vivid red – the colour of decreases and negative developments, in stock exchange language.

A breathe of fresh airThus, by mid-August, after the release of financial results for Q2, the Exxon and Chevron shares (companies ranked 1 and 4 of the top 10 largest integrated oil companies, according to the value of market capitalization recorded by mid august 2015) registered a decrease of approximately 24% and 36% respectively against the values recorded at the end of June 2014 (the month in which it began the corrective trend that has led oil prices down by more than 50% below last year). At the same time the Occidental Petroleum’s shares (11th by the market capitalization value worldwide) recorded at the same time a decrease of 28% as compared to June 2014. For comparison, at the same time, the oil price was about 60% lower against the values in June last year.

POOR RESULTS FOR INDUSTRY LEADERS

The same negative developments on the financial results can actually be noticed for the other companies part of the leading ‘squad’ on global scale, the poor results in Q2 coming after a set of poor results in the first three months of the year. Thus, among the top 15 world’s largest companies on the oil market, a hypothetical ranking, (made up according to market capitalization value by mid-August 2015), the players who has registered positive trends were the exceptions. Specifically: by mid-August, 14 of the top 15 companies in the rankings had published financial results for Q1 2015; of these, only one company (namely PetroChina) reported an increase in turnover in Q1 2015 as compared to Q1 2014 (a modest one, of only 4%); on the other hand the company reported a drop in profit by 79% (from EUR 4.1 billion in Q1 2014 to EUR 876.5 million in Q1 2015).

In fact, when looking at the 15 companies in terms of profits earned in Q1 2015 it can be seen that, from among the industry giants, only one company reported growing results. It was Royal Dutch Shell, which registered in Q1 2015 a EUR 3.94 billion profit, by about 20% higher than that achieved in the same quarter in 2014 (of EUR 3.29 billion) (see the chart ‘Declining results for the industry giants’).

At the other end it is Statoil to be mentioned, which in Q1 2015 reported a loss higher than EUR 4 billion, thus recording a decrease of 244% as compared to Q1 2014 (when it registered a profit of EUR 2.8 billion) due to the fall in turnover by 35% (from EUR 21 billion to EUR 13.6 billion).

In the second quarter the heavyweights of global industry continued the negative developments, thus providing a clear picture of the really difficult situation the industry is going through: thus, during April-June 2015, nine out of ten companies who published the results until mid-August (the remaining five are to publish the results in September) reported falling profits as compared to the second quarter of 2014.

In Q2 the exception was the French company Total, which obtained a profit of about EUR 2.7 billion, by about 19% higher than in Q2 2014 (approximately EUR 2.3 billion). Total surprised the market, reaching a bigger profit than expected by analysts, amid a better than expected improvement in refining margins and huge cuts of costs (including by layoffs) and following cuts of capital investments and of assets sale.

The next ‘best’ progress in Q2, was registered by the Dutch company Royal Dutch Shell, which reported a profit of EUR 3.6 billion, by only 7% lower against Q2 2014 (EUR 3.87 billion); this company too has reduced the operating costs and has cut down investments, along with staff reductions which have offset the negative impact of lower oil prices.

THE WEAKEST IN TOP 15

At the other end, some of the weakest developments in Q2 were registered by BP, Eni and ConocoPhillips - three companies of the 15 largest global players which reported losses against Q2 2014. Thus, Italy’s Eni reported a loss of EUR 113 million (compared to a profit of EUR 658 million in Q2 2014), ConocoPhillips had a loss of EUR 161 million (compared to EUR 1.5 billion profit in Q2 2014), while the British company BP recorded losses of about EUR 5.3 billion (against a profit of EUR 2.4 billion in Q2 2014).

In BP’s case, however, it should be noted that the negative dynamics of profits was boosted by the massive cuts in operations in the Gulf of Mexico (put on hold for extensive maintenance activities) and by the blocking of operations in Libya because of political and military turmoil in this country. Hence, the BP’s operational profit from the oil and gas exploitation and production fell in Q2 2015 to about EUR 430 million (EUR 494 million, according to the company’s releases) against a level higher than EUR 4 billion (USD 4.7 billion) in Q2 2014. For comparison, the other six of the ten companies which had published their results until mid-August marked profit decreases of up to 80% (see the chart ‘Declining results for the industry giants’).

NEGATIVE RESULTS EXPECTED

Results for Q2 do not include PetroChina, Sinopec and Rosneft, because the deadline for revealing the reports is at the end of August. The information that has reached the market suggests they had a similar development with the large western companied. Maybe worse! Thus, Gazprom’s data regarding the output reveal the Russian giant registered the poorest results in its history in the first six months; figures show that in H1 2015 the gas production decreased by 13.1% to 209 billion cubic meters, while gas exports fell by 12.9% to 88.5 billion cubic meters – which will be felt in the financial results for Q2 2015, even without taking into account a very similar pattern of the oil sector. A similar poor development of financial results could be considered, even in the absence of official data, for the Chinese company Sinopec, as the company offers clues. Answering the questions coming from investors regarding the improvement in Q2 against Q1 - company representatives said there’s not much reason for optimism. “With crude oil prices fluctuating at a low level in the first quarter of 2015, the Company’s results in the second quarter would mainly depend on the changes in oil prices, domestic oil market conditions and the implementation of a low-cost strategy,” the company commented on its website.

DECREASES ON THE STOCK MARKETS

Subsequently, the above data reveal that the large players on the global oil market had to face an important financial challenge in the first six months – a challenge they did not met quite well. The data and the negative development were reflected in the companies’ share prices that have registered significant falls in the stock markets. Thus, by mid August (before the stock markets were hit by the wave of massive decreases on the Chinese bourse) the shares of above mentioned 15 oil industry giants registered falls of 25% to 50% compared to the mid 2014 market prices. As stated before, June 2014 taken as landmark, is the starting point for the corrective period that has led the oil price down by 50% in the second half of 2014; the same trend that still seems to be in place 14 months later, meaning by mid August 2015 (see the chart ‘Industry majors, decreases on the stock markets’).

Declining results industry giantsIt should be noticed that, although they haven’t released their financial results - and thus gave no reasons to sell to investors, the Russian companies’ shares are by far the hardest hit; e.g. Gazprom shares registered a minus of 51% against mid last year, while Rosneft shares scored minus 48%. Yet, in their case, it’s very likely that over the strong negative impact presumed to be seen in the financial results as a result of oil price drop, it adds the pressures coming from the Russian companies difficulties experienced due to international sanctions; sanctions that have limited, over the past approximately 18 months, not only access to liquidity, but also access to new technologies - which, obviously, has significantly reduced their ability to meet the challenges of the new economic context.

Besides the Russian companies, among the other players that registered massive falls on the stock markets is Petrobras from Brazil – whose shares had fallen by 60% against mid last year. Petrobras’s development on the stock exchange was most likely influenced by the poor results during Q1 and Q2 and, on the other hand, by the poor results determined by the negative development of Brazil’s macro-economic indexes.

Among the oil companies representative for the countries included in BRIC (Brazil, Russia, China, India – a group of states that not long time ago were credited with the potential to turn around the balance of global power, now facing unprecedented difficulties in the past two-three decades)... there’s an important US company! It’s ConocoPhilips – the US oil giant whose shares registered by mid August a 40% fall against June 2014. ConocoPhilips thus marks the steepest fall of all western players in the field; besides the effect of decreasing oil prices, the company’s shares were pulled down, analysts say, by a too large exposure on the development of new operations segment; operations having as an important ratio the exploration and exploitation of alternative deposits, having a profitability hit by the steep fall in prices.

RESULTS IN CENTRAL AND EASTERN EUROPE

Market volatility and the prices in the minimum level area was also felt in the figures reported by oil companies in Central and Eastern Europe in the first two quarters of the year; however, differentiated and less comprehensive in the companies’ development of sales/turnover and far less serious in the evolution of profits. The figures dynamics show that the relationship between the negative market context and the company profits hasn’t been as closely in the case of CEE companies as it was in the case of the 15 largest global players mentioned above. On the contrary, for some of the regional companies Q2 2015 seems to have been in fact a recovery time in terms of profitability, almost contrary to the trend of oil prices. This is seen, for example, in the results of the Polish company Lotos, which in Q2 2015, when oil prices began to re-enter the falling trend, marked the transition from losses (reported both for Q1 2014 and Q1 2015) to profit. It wasn’t a profit to ignore! Lotos reported a PLN 101 million (EUR 24 million) loss in Q1 2015 and a PLN 377.3 million (EUR 91 million) profit in H1. As such, in Q2 2015 it succeeded to get a profit of PLN 478 million (EUR 114 million) (meaning PLN 377.3 million or EUR 91 million effective profit on six months, plus PLN 32.3 million of EUR 7.8 million to cover the losses in Q1).

Another example of positive development in terms of profitability is the Polish company PKN Orlen. After EUR 1.25 million losses in Q2 2014 it achieved a EUR 185 million profit in Q1 2015 and of EUR 326 million in Q2 (see the chart ‘Financial results in CEE’). For a better interpretation of the data in the chart, several elements must be considered. One is that the conversion from national currencies to EUR was made using the exchange rate published on the ECB’s website for the last day of the reporting period; therefore some differences may appear between the figures given by/from other sources. Another potential problem could be due to the fact that the calculations may lead to a figure of apparent inconsistency.

Such a situation can be observed in the quarterly change (487%) of the profits registered by Lotos in Q2 2015 against Q2 2014 (note** of explanations in the chart ‘Financial results in CEE’)! In interpreting the respective number one should bear in mind that Lotos reported a loss of EUR 29.5 million in Q2 2014 and a profit of EUR 114 million in Q2 2015; therefore the percentage change shows that the company has recovered the loss in Q2 2015, posting a profit 4.8 times higher than the absolute loss in Q2 2014. Also, in the case of PKN Orlen, the growth in figures (note*** of explanations in the chart ‘Financial results in CEE’) can lead to a small misunderstanding: the interpretation should be that the company registered a profit of EUR 326 million in Q2 2015, as compared to a loss of EUR 1.25 billion reported in Q2 2014. Consequently, the percentage change of 126% in profit in Q1 2015 against Q1 2014 shows that PKN Orlen went from loss to a profit by 26% higher than the loss registered in the mentioned quarter.

TOP DEVELOPMENTS IN Q2

Going further on positive developments, one can notice the PKN Orlen achievements in Q2 are a continuation of a very good route in Q1 2015; in that interval it registered EUR 185 million profit (when reported the profit has reached only EUR 15.3 million). PKN Orlen stands out in the region for postingIndustry majors Financial results in ECEthe highest profit in Q2 in absolute figures. The companies to follow are Tupras from Turkey, which reported a profit of EUR 238 million, and OMV from Austria with a profit of EUR 209 million. Another positive dynamic in terms of financial results (an exceptional development one could say!) is the one of Hungary’s MOL. In Q2 2015 it reported the best quarterly results in the past years: more exactly, in spite of a falling turnout by 10%, MOL registered a profit increase of 157%, from EUR 62 million in Q2 2014 to EUR 199 million. “We are proud of our Downstream team, which delivered its best ever results. This shows that we are well placed to benefit from the present opportunities in the downstream sector and also reflects the successful implementation of our efficiency enhancement measures,” MOL representatives said in the release accompanying the quarterly financial reports. “Meanwhile, in order to ensure efficient capital allocation we have further scrutinized potential spending. Currently we expect around USD 1.3 bn organic investment in 2015. We will maintain our excellent free cash flow generation and strong financial position, which is a key advantage in the current volatile environment,” MOL representatives said on the same event, adding they have positive expectations for the second half of the year.

CEE companiesFrom the dynamics point of view, the Romanian oil and gas company OMV Petrom also managed a very positive development in the second quarter (+ 118%). Nevertheless, the good results in Q2 failed to offset the weak results in Q1, so that in H1, OMV Petrom registered a lower profit than the one achieved in H1 2014 (RON 1.04 billion vs. RON 1.38 billion). Positive dynamics in profits in Q2 2015 has also registered the Croatian company INA Industrja (+ 112%) as well as OMV (+ 58%); the increase in profit margins in the downstream sector and the higher refining margins are the two elements by which these regional companies have managed to offset the negative effects of low oil prices, unlike the 15 largest global players analysed above, which failed to respond to the challenges just as good.

THE COMPANIES IN CEE, GROWTHS ON THE STOCK EXCHANGES

Unlike the 15 multinational companies under scrutiny at the beginning of the article, the shares of oil companies in CEE have better withstand on the stock markets. Decreases were smaller and there are lots of positive developments – as seen in the chart ‘CEE companies on the stock markets’.

It is to be noted that, for the conversion of quotations from the trading currency to EUR, the ECB exchange rate for those periods was used, making possible that the rounding and exchange rate differences to lead to some differences against similar figures taken from other sources; also, for the same reasons, percentage variations may be slightly different against those from other sources. Regardless of the slight discrepancies that may arise from the conversions or rounding, the developments of oil companies on the CEE markets are obviously positive!

For example, against the value registered at the end of June 2014 (as mentioned, the month that marks the debut of the aggressive downward trend for oil prices) the PKN Orlen shares had, by mid August 2015, a increase of 88% (up from the equivalent of around EUR 9.86/share to over EUR 18/share); PGNiG, another large Polish company (which didn’t stand out in terms of profits - but still had a positive trend in results), recorded by mid August an increase of the shares market price of 25% against mid last year (up from the equivalent of EUR 1.26/share to EUR 1.56 euro/share). The positive evolution of Polish companies are complemented by those of the Turkish company Tupras, whose shares have increased by 30% (up from the equivalent of EUR 17 to EUR 22) during the same period, in relative harmony to the profit dynamics in Q2 2015 (which had an increase of 93% as compared to Q1 2014).

For comparison, at the other end, devaluations similar in magnitude to those recorded by the shares of the 15 largest global players analyzed in the first part of the article, were recorded by OMV - together with the Romanian subsidiary OMV Petrom (minus 31% recorded by OMV Austria and minus 28% by the OMV Petrom shares), and the shares of the Croatian company INA Industrja, which during the same period (June 2014 - August 2015) lost about 45% of the value.

NEGATIVE OUTLOOK

And yet, it seems the hardest part is not over! Neither for industry leaders, nor for regional companies. However well they might get prepared to face the challenges of the new economic context, any further downward trend of oil prices would increase the pressure they extremely seriously feel on the profit margins of the exploration and exploitation operations. Unfortunately, by mid August the figures were not at all encouraging, as under various stimulus WTI (the reference for the US market) was evolving on an aggressive downward trend to about USD 40 per barrel (by the end of the month it went below this threshold!), while Brent oil (the reference for the European market) was going in the same direction (see the last part of the chart ‘A breath of fresh air for industry’). Within this context, the evolution of oil companies’ shares could not have the support for positive developments, especially within an unfavourable stock exchange context determined by spectacular corrections of the important global stock exchange indexes (following the stock exchange earthquake having as epicentre the Chinese capital market!). Hence, in the second half of the year, the oil industry is to face a red period (colour given by the negative developments in stock exchanges’ language)... similar to the one that has just ended.

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