two bits of news this morning makes one wonder if we’re in a downward spiral which will have a much longer way to go down before it hits bottom
By Reuters On November 9, 2014
LONDON/PARIS, Nov 9 (Reuters) – Belt-tightening by big energy majors faced with plunging oil prices is battering the finances and share prices of their suppliers, as investors reassess the sector’s ability to keep gushing cash.
A growing list of delayed or cancelled projects, seen by some investors as a healthy move by majors to rein in capital spend after a poor history of returns is working its way through corporate earnings; it has already pummelled the share price of some European suppliers seen as financially fragile.
Fugro, once seen as a blue-chip on Amsterdam’s benchmark index, has had more than 30 percent of its stock-market value wiped out in a week since scrapping its dividend. It is seeing trade swings more suited to a small-sized firm: on Thursday its one-day gain was 28 percent.
The worst of this volatility may yet be to come, analysts and fund managers warn, as the recent fall in oil prices – triggered by a supply glut as well as worries over cooling demand – and the delayed effect of capital-expenditure cuts keeps up the pressure on companies to plug balance-sheet gaps.
“Oil services firms are like euro zone banks a few years ago. There’s a lot of damage in the sector and it could get worse before it gets better,” said Arnaud Scarpaci, fund manager at Montaigne Capital.
And that in turn may tarnish the long-term appeal of an energy sector that has consistently been among the top dividend-paying industries since the financial crisis, representing around $41.6 billion in total payouts for the second quarter of 2014 alone, according to data from Henderson Global Investors.
According to analysts at Nomura, Norwegian oil-drilling contractor Seadrill is one example of a firm that could fill an expected funding gap in 2015 by cutting dividends. Seadrill declined to comment.
“Everybody’s concern is that we are in a deteriorating market (for suppliers),” said KBC analyst Dirk Verbiesen.
Brent crude prices have tumbled nearly 30 percent in the past five months, to $82 a barrel – a level not seen in four years, with some expecting the supply-demand mismatch to get worse. A recent Reuters poll of economists and analysts shows that Brent is seen averaging $93.70 in 2015 and $96.00 in 2016.
This has caught oil majors, not just suppliers, off-guard – French group Total for example still uses $100 per barrel in its projections – and is starting to seriously dampen their plans to ramp up investment.
But oil majors by and large are bigger and more diversified than their suppliers, allowing them leeway to protect payouts. BP even announced a dividend increase last month.
So while Fugro and peers like Petroleum Geo Services and CGG are facing these pressures with a net-debt-to-EBITDA ratio of between 1.9 and 2.8, according to Reuters data, more diversified oil majors like BP and Royal Dutch Shell are at between 0.5 and 0.8.
“The fall in oil prices is unlikely to incite oil companies to invest in the short term…This has dragged down the oil-services sector but it has also been made worse in certain cases, including Fugro, by stretched balance sheets,” said Alain Parent, an analyst at Natixis in Paris.
Reached for comment, Fugro said its business had “compelling long-term potential” but that it faced challenging mid-term market conditions as a result of spending cutbacks. It did however say that it might benefit from a new era of no-frills services by offering more standardised products.
This week, France’s CGG posted a brutal 24 percent drop in quarterly revenue as the group scrambles to reduce the size of its seismic survey fleet, while Norway’s Aker Solutions warned that oil companies could further delay major projects.
Seeing blood in the water, hedge fund short sellers have been circling shares of oil services companies, with CGG, Fugro and Seadrill featuring among the most shorted stocks in Europe, with between 8 and 10 percent of their shares out on loan, according to Markit data.
Hedge funds AQR Capital Management, Marshall Wace LLP, BlackRock Investment Management, Citadel Advisors and Oxford Asset Management feature among the funds with the biggest short positions on oil services shares, according to regulatory filings with European market regulators.
Marshall Wace, Citadel and Oxford AM declined to comment, while officials for AQR and BlackRock were not immediately available.
Officials from Petroleum Geo-Services could not be reached immediately. A spokesman for CGG referred to comments made on Thursday by the company’s CEO Jean-Georges Malcor, who said the group has already made a lot of adjustments and cost cuts to cope with order cancellations and an oil price around $80.
Montaigne Capital’s Scarpaci warned that sharp rebounds in prices like the ones seen on Thursday in a number of stocks could happen in the coming weeks, given the bearish consensus and the high level of short selling.
“The level of pessimism is reaching a high point on both crude oil prices and the sector’s shares, so there’s a risk of short-lived rebounds and short-covering rallies.”
Also, some investors feel that the sector is in a state of overcapacity and that fragile firms that eventually merge or drop out will allow stronger players to mop up market share.
But given the long road ahead for the sector’s clean-up, the likelihood is that these stocks face big short-term price moves rather than a quick shift in long-term investor sentiment.
By Rob Almeida On November 9, 2014
Transocean offshore drilling reported on Sunday a net loss of $2.217 billion this quarter, or $6.12 per diluted share.
Considering the Zug, Switzerland-based offshore drilling firm has a current market cap of USD $10.8 billion, this quarterly loss will most certainly leave a large dent. So far this year, the company’s share value has plummeted 43 percent.
The one-time loss was almost entirely due to a write-down of the value of the company’s fleet of drilling rigs.
With oil majors spending less on deepwater exploration the demand for offshore drilling services is moderating while at the same time a plethora of new high specification rigs are coming into the market.
Deepwater drillers like Ocean Rig, Seadrill, Ensco and Diamond Offshore have all fallen over 30 percent this year as focus is put on less capital intensive sourcing of hydrocarbons.
Putting things in perspective, land-based drilling contractor Pioneer Energy Services has ended up largely even this year after its share value had more than doubled mid-summer when oil prices were at their peak. Nabors Drilling has had similar results.
Transocean notes revenue efficiency and fleet utilization were both slightly lower in the third quarter, yet the good news is the Transocean Amirante will be headed back to work for a 1-year contract at $335,000 per day. The rig was previously idle.