Uncertainty in the Pipeline: Energy Companies Navigate COVID-19
COVID-19 has sent the price of oil per barrel in a downward spiral. The plummet in business travel, cruises, vacations, weekend getaways, and non-essential travel have all led to a decreased demand for oil.
The resultant price drop has left many companies selling oil at a loss. With prices hovering at the low to mid-$20 range per barrel, even larger companies are not immune to COVID-19’s effects. According to Goldman Sachs estimates, Chevron needs $50 per barrel to cover costs and its dividend, while ExxonMobil requires approximately $70 per barrel to do the same.
The decreased demand for oil began in late 2019 after COVID-19 surfaced in China. Then, in March, two oil-rich nations, Russia and Saudi Arabia, failed to reach agreement on price. Their highly publicized price war caused financial turmoil for energy companies worldwide.
The leveraged financial structure of many energy companies exacerbates the problem. Industry experts are nervous about the future of many companies with insufficient cash flow to maintain their debt obligations. The Wall Street Journal has reported that by year’s end upstream companies could default on over $32 billion of high-yield debt. Since production levels have yet to slow to match the decreased demand, energy companies must find a diminishing supply of storage space. This has caused increase capacity strain on regional storage companies to store the excess production.
In such market conditions, many energy companies will file for bankruptcy. In the first quarter of 2020, eight oil-field service companies, seven oil companies, and two pipeline operators filed for chapter 11 due, in part, to a combined total of over $18.8 billion in debt. Whiting Petroleum, whose market cap peaked at just over $11 billion in 2014, was the first large fracking company to file for bankruptcy this year. It had $3.6 billion of listed debt when it filed and could not make payment on a $262 million debt that had come due.
Despite these headwinds, energy stocks have been given a glimmer of hope. At an April 9th meeting of OPEC+ countries, Russia and Saudi Arabia agreed to curtail their price war. And on April 12th, OPEC+ and Group of 20 countries agreed to cut oil production. OPEC+ will cut its production by 9.7 million barrels per day, while G-20 will cut its production by 5 million barrels per day. Yet even with this progress, price stabilization is not guaranteed. For instance, G-20 member Mexico agreed to cut its oil production by just 100,000 barrels per day. Both Goldman Sachs and UBS remain skeptical that this slash in output will have its intended impact due to the decrease in oil demand. According to Goldman Sachs, a decrease in demand by 19 million barrels per day will keep pressure on energy stocks.
We will continue to monitor the economic impacts of COVID-19 on this and other industries, particularly those that may be hardest hit. In the meantime, we wish our readers safety and good health.