On the face of it, the Majors turned in some pretty good results in the second quarter. Most companies reported substantially higher earnings than in the second quarter of the previous year off the back of higher oil and gas price realisations. Moreover, the trend for the group has been steadily upwards since early 2009, albeit starting at a lower overall level than the heady days of 2008 when bloated oil prices swelled company coffers.
BP stands out with its spectacular $17 billion reported loss in the second quarter, and even if we look at its underlying performance by removing the effects of non-recurring items, growth in adjusted earnings was just 15% – much lower than any of its peers. (see Normalised Net Income graph below). So not much cheer to report here.
So earnings in the short term look reasonable. But now let’s stand back a bit and look at what the markets make of all this. The graph below of market capitalisation at end quarter tells the story. You can see the catastrophic drop in BP’s market capitalisation during the second quarter but note also that the overall trend is for the market value of ALL of these companies to fall. Indeed while ExxonMobil is falling from a greater height, the gap between its total market cap and that of its competitors is narrowing. A certain lack of enthusiasm among investors for its deal with XTO appears to have a lot to do with this. The same pattern shows up if we compare enterprise value for these companies. The conclusion you might draw is that in terms of perceived future value, (as opposed to generating dividends) these companies are in trouble.
Debt Capacity – or Lack of It
Despite the exceptional calls on BP’s capital during the second quarter as a result of the Horizon disaster, the company managed to further trim its debt exposure relative to its capital employed. The company’s ratio of debt (net of cash) to total capital employed was just 18.5% by the end of the second quarter, Evaluate Energy calculates. This may be high by the standards of BP’s main competitors but not particularly onerous in an historical perspective.
If we take a ratio of net debt to capital employed of 35% as being the maximum sustainable level typical in the oil industry, Evaluate Energy calculates that BP could raise some $19 billion in new debt while still keeping its debt to total capital employed ratio below that ceiling. While that amount of upside leverage at one time looked considerable, it would appear that in the eyes of BP’s board, it may not now be enough. Hence the company’s moves to dispose of assets on a massive scale.
By way of comparison, Evaluate Energy estimates that ExxonMobil could currently raise some $50 billion, and Shell about $34 billion while still staying below the 35% ceiling.
Crude production continued its virtually relentless slide during the second quarter with a 142,000 b/d drop compared with Q2 2009. Only Chevron managed to increase its crude output (by 71,000 b/d) during the second quarter due to major start-ups and rampups in the the US and Brazil and the expansion of capacity at Tengiz in Kazakhstan.
Meanwhile natural gas production fell back from its first quarter highs driven by cold weather.
Capital Spending for the Group fell by 4% overall during the second quarter, partly reflecting sharp cutbacks in capital spending in the Refining and marketing segment. Capital expenditure in refining and marketing was slashed by more than 40% to $706 million during the quarter following a cut of 20% in the previous quarter. Upstream, BP had to boost its quarterly capex by a massive $1.6 billion to cope with events in the Gulf of Mexico, while Chevron, ExxonMobil and Shell increased their upstream capex by a combined total of $1.4 billion compared with Q2 2009. ConocoPhillips and Total both trimmed their upstream capital spending by $314 and $255 million respectively.
Crude Oil Price realisations continued to climb in Q2 as can be seen from the graph below, and were up an average $20/bbl (+38%) for the Majors as a whole compared with Q2 2009.