Counting the cost of oil crash

THIS week's savage sell-off in oil and gas stocks was stemmed at least temporarily on Tuesday as analysts started counting the toll the historic oil price crash may take on earnings and future investments, writes Angela Macdonald-Smith in The Australian newspaper.
Counting the cost of oil crash Counting the cost of oil crash Counting the cost of oil crash Counting the cost of oil crash Counting the cost of oil crash

Angela Macdonald-Smith

Oil Search, the hardest hit ASX-listed player on Monday when it lost an astonishing 35%, edged up 1.8% on Tuesday, while Santos and Woodside also saw very modest gains that hardly dented Monday's heavy losses.
The move reflects the serious hit that the free-for-all between Saudi Arabia and Russia for oil market share is expected to take, just when demand is being suppressed by the coronavirus epidemic.
Woodside Petroleum will likely have to delay its $16 billion Scarborough LNG project, Morgan Stanley said, while Santos could delay its $7 billion Barossa gas project.
"Santos was the only company during the recent reporting season that mentioned it could slow spending on some of its growth projects should the bear case commodity scenario play out," Morgan Stanley analyst Adam Martin said.
Analysts at Macquarie Wealth Management said neither Scarborough, in which BHP has a stake, nor BHP's Trion oil project in Mexico, generated an "acceptable" return at current oil prices.
Macquarie said that at spot oil prices late on Monday, BHP's earnings estimates would be cut 11% to 12%, while the net present valuation on the stock falls 9%. That compares with a decline of about 14% in BHP's share price on Monday.
BHP's share price had a 6.2% rebound on Tuesday.
Crude oil prices stabilised on Tuesday after a drop of about 24% the previous day, with Brent crude up 7.7% at $US37.03 a barrel. But prices are down by more than 45% this year, on the combined impact on demand of coronavirus and likely increases in supply.
"Put the coronavirus aside for a second, any time that Saudi Arabia decides they are going to open the spigots it's going to have a big impact on oil pricing," BHP chairman Ken MacKenzie said on Tuesday, while adding the group still saw oil as an "attractive" commodity to be invested in.
Macquarie pointed to "material risk" to earnings at Santos, Woodside, Oil Search, Karoon Energy and Carnarvon Petroleum at current spot prices, but noted that Beach Energy, Cooper Energy and Senex Energy are less vulnerable given their exposure to east coast gas.
The analysts pointed to the risk of deferral of several of the many oil and gas projects due to reach a final investment decision over the next 18 months.
"At current prices, the array of growth options available to Australian producers may be deferred, which would help protect balance sheets," Macquarie added, while retaining "outperform" calls on stocks across the sector.
Overnight, the International Energy Agency slashed its forecast for oil demand growth this year by one million barrels a day due to COVID-19, sending it into negative territory for the first time in 11 years.
But the expected drop in demand of about 90,000 barrels a day to 99.9 million barrels a day is still regarded as optimistic by some analysts.
"This is still too optimistic," said FACTS Global Energy from London, which is forecasting a contraction of 560,000 barrels a day in demand this year, including a year-on-year contraction of three million barrels a day this March quarter.
FGE noted that while low oil prices would normally act as a stimulus for the world economy, driving a jump in oil use, the nature of the coronavirus crisis means low oil prices may fail to stimulate consumption or trigger an economic rebound.
"If panicking people stay at home and don't buy, don't fly, don't consume, any recovery in manufacturing along global supply chains will only be short-lived and can turn quickly into a downward economic spiral," it said.