Earnings season is in full swing, allowing investors and traders a look at the inner workings of an industry creaking under the strain of ‘lower for longer’.
The bottom line is, of course, the bottom line. The fall in crude prices has suppressed revenues and cash flow and led to huge impairment charges as assets are revalued. This means smaller profits, at best; headline-grabbing losses are more likely.
But the eye is increasingly drawn to below the profit and loss accounts and to the balance sheets, thanks in no small part to the credit ratings agencies Moody’s, Fitch and Standard & Poor’s (S&P).
In the week leading up to the start of earnings season, the agencies had their say on discretionary spending, put an entire sector on review and then, on the eve of earnings season, S&P cut Shell’s credit rating and warned it was seriously thinking about doing the same to all Shell’s European peers. This latter move came with the caveat that it had nothing to do with Shell’s takeover of BG, and when that has been examined there is a strong chance of another downgrade.
The timing may have been in classic headline-grabbing style, but there can be little doubt of the substance. BP reported that its net debt increased by 20pc in 2015; ExxonMobil’s total debt increased by 33pc over the same period.
For oil producing companies, see also oil producing countries. S&P has also had its say on Azerbaijan, and reports of a mercy mission from the IMF bode ill for the future of Baku’s long oil boom. Nigeria has reportedly approached the World Bank to plug a hole in its budget. Even Saudi Arabia may visit the international bond markets, which would be a move without precedent.
There are holes everywhere. To mitigate, sovereigns cut spending on energy subsidies or public services; for corporates, capital expenditure (capex) bears the brunt. Deutsche Bank expects capex among Europe’s integrated oil companies to fall by almost a quarter by 2017 from 2014, freeing up $30bn of cash to offset around three-quarters of the fall in crude prices.
But for both, some spending remains sacrosanct. For countries this is defence of the realm, even if public finances in many Middle East producers are being bent out of shape by war. For companies it’s defence of the dividend — ExxonMobil hiked its fourth-quarter payout despite everything. RBC Capital Markets cautioned that BP’s ability to cover its dividend will be limited in the absence of higher oil prices.
War costs. Keeping shareholders happy does also. Borrowing can make up the shortfall. If the world is drowning in oversupply, as the IEA put it last month, then those producing the crude are increasingly afloat on an ocean of debt.