Crude oil is one of the largest traded and consumed commodities across the world and has significantly fallen during the past couple of years. In Televisory’s earlier blog on the crude oil, we discussed the demand-supply structure of the commodity pertaining to the US economy. In this blog, we focused on the changes in the global demand-supply dynamics amidst falling prices and its repercussion on some of the major industry players.
According to the EIA (Energy Information Administration) data, the global supply of crude oil increased by 2.6% for the year 2014 and 2015 respectively, to 95.8 and 96.2 MBPD (Million Barrels Per Day). The increase in supply was driven by a strong growth from non-OPEC countries with the US and Canada contributing a major proportion in the rise. OPEC registered a moderate fall in the production during 2014, though it managed to eke out a marginal rise in the output during 2015. The consumption during the aforementioned period was hit by the contraction in the European region, while a very small rise was seen in the demand from the US and Japan amongst the developed world. In the developing countries, China and other Asian countries moderately contributed towards an increased demand, however, they were insufficient to match an oversupplied market. The global consumption of the black liquid rose by 1.3% and 1.6% during 2014 and 2015 to 94.1 and 95.4 MBP, thus, recording a surplus in both these years. Notably, the surplus in the year 2015 stood at 1.7 MBPD, which was the highest in the last two decades.
Source: EIA Data and Televisory’s Research
An overview of data for the past five years indicate that the oil market continues to reel under high supplies from the OPEC and other parts of the world. A surplus in the commodity pushed crude oil prices to a lower level, some rationalization in supply can be seen in the US and Canada which have recorded stabilisation and a marginal decline in the production. As per the EIA estimates in 2016 global supply for the oil is expected to rise by 0.4% to 96.2 MBPD while consumption is expected to see a growth of ~1.4%, this will help in cutting down of the surplus to below 1 MBPD from 1.7 MBPD prevalent in 2015.
As crude oil prices continue to trade lower, we are observing few tangible responses from the major global producers, particularly the US where high-cost operators have been cutting their excess supplies. Although the output from the OPEC has continued to be high during 2016, they too are considering the curtailment of their output commencing from 2017. The OPEC members in a meeting on September 2016, agreed to reduce production in the range of 32.5 to 33 MBPD from near 33.5 MBPD in the middle of 2016. However, a final call on the agreement will be taken at the OPEC’s forthcoming meeting on 30th November, members might act cohesively to deal with the lower oil prices and help to alleviate the surplus which the industry is facing for the last couple of years.
The effects of low oil prices are also impacting the financial performance of the companies operating in the business. In order to study the phenomenon, Televisory reviewed data from the 9 major players involved in the oil and gas industry around the world, namely, Chevron Corporation, TOTAL S.A., BP PLC, Exxon Mobil, Royal Dutch Shell, PetroChina, Petroleo Brasileiro, LUKOIL PJSC and Rosneft. The last 5-years data (2011-2015) reveal that average realization for the companies under review remained largely in line with the movement in international crude oil benchmarks, the ICE-Brent and the NYMEX-WTI. The average revenue per BoE (Barrels of Oil Equivalent) remained broadly stable between 2011-14 period while this slid ~40% during 2015.
Source: Bloomberg Data and Televisory’s Research
On the production volumes, these companies have managed to maintain steady volumes or even record a moderate increase. On the other side, the revenue which rose in 2011, stood largely linear during 2012-13 and witnessed a drop during the 2014-15.
Source: Bloomberg Data and Televisory’s Research
Source: Bloomberg Data and Televisory’s Research
On the operations side, average EBITDA for these companies also witnessed a near similar scenario with the EBITDA recording a drop, especially in 2014 and 2015. Shrinking EBITDA margins to under 13% (2015), from an average EBITDA margin of over 18% during the year (2011). The initial numbers for the first three-quarters of 2016 are replicating a near similar structure wherein EBITDA and EBITDA margins have continued to deteriorate for most of the companies under the review.
A stable to high oil price scenario during 2011 to mid-2014 drove companies to invest heavily in new explorations, refining and other forward integrated ventures. The same was dealt with the increased amount of equity offering and strongly supported debt. The debt of the companies increased at an average rate of ~14%, ~27% and ~8% during 2012, 2013 and 2014 respectively.
Source: Bloomberg Data and Televisory’s Research
Therefore, as companies faced issues due to falling revenue realization and operating margins, higher debt servicing cost had negatively inflicted their bottom-line. The companies under the review saw their average EBITDA/interest expense ratio slipping to ~16x in 2015 as against over 55x in 2011. On the contrary, debt to equity ratio more than doubled, the average level moved higher from under 0.3x in 2011 to over 0.6x in 2015.
To summarise, with the situation in the major global economies still continues to be on a mixed note, there is less probability that any significant positive move will happen in terms of the consumption. Meanwhile, the production from the US and Canada has stabilised based on the data of the first ten months of 2016. The upcoming 30th November meeting of the OPEC members would be watched very closely. The industry is definitely looking for a major shift against the currently oversupplied market.
Also Read:- Natural gas industry with a focus on Shale Gas, development and present scenario in the US
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