What’s Going To Happen To The Oil & Gas Industry
Companies in Singapore’s stock market that operate in the oil & gas industry are suffering.
In the second quarter of 2017, Keppel Corporation Limited’s (SGX: BN4) Offshore & Marine business segment posted a 98% decline in profit. Sembcorp Marine Ltd (SGX: S51), another of Singapore’s large oil rig builder, saw its 2017 second quarter profit get slashed by 65.5% from a year ago.
Then late last month, offshore support vessels builder Nam Cheong Ltd (SGX: N4E) suspended its stock from trading after it couldn’t service its borrowings.
With oil prices today still down by over half from their 2014-peak of over US$100 per barrel, what can investors expect of the oil & gas industry in the near future? Three recent articles and podcasts from my colleagues in the US provide some useful context on the industry’s prospects.
In late July, oil prices hit a six-week high. Motley Fool analysts Sean O’Reilly and Taylor Muckerman explained in a podcast why that had happened:
“O’Reilly: U.S. crude is about $47, always trades at a little bit of a discount. But that was because the EIA said that U.S. crude stocks fell 4.7 million barrels during the weekend of July 14; this exceeded estimates of a draw of 3.2 million barrels.
Also of note that I actually wanted to highlight was, if you include inventories of all petroleum stuff, particularly gasoline in this case, inventories fell by 10 million barrels for the week, which is fun. When we were talking about this before the show, you were like, oh, seasonality. But on the other hand, does that 3.2 million that was anticipated factor that in?
Muckerman: Probably a little bit, yeah. They play the trends. But they were also way wrong on inventory builds over the last couple months.
O’Reilly: To your point, every time I see these, I’m like, aren’t they cute?
Muckerman: Yeah. They expected a draw off a handful of weeks ago, and it was up. Inventory was up a couple hundred thousand, maybe a million barrels. So it’s just surprising. Inventory data seems to be the only thing really driving oil prices up or down, because they’re pretty staid when it comes to the window that they’ve been trading in, in the $40s.
O’Reilly: Right. And again, no matter what happens with oil, if it goes to $20 because of electric cars in five years or if it goes back to $70 or $80, no matter what, my opinion on U.S. traders focusing on U.S. inventory data, it’s ridiculous. We have the only good data, and that’s why they do it, but we’re 15% of the global market.”
When it comes to oil prices, the thoughts of OPEC – the Organisation of Petroleum Exporting Countries – cannot be ignored. OPEC is a 13-member cartel that includes most of the key Persian Gulf states, such as Saudi Arabia, Iraq, and Iran. Other members of OPEC are five African countries and two South American nations.
In an early July article, my fellow Fool, Dan Caplinger, wrote the following:
“Late last year, OPEC approved a long-term strategy that called for limiting supply to boost prices. The move was controversial even among member nations, with big producers such as Saudi Arabia having initially argued that supporting prices would backfire by allowing higher-cost producers to be profitable. The resulting release of supply could bring a repeat of the price plunge in 2015 and early 2016, when oil prices dropped below $30 per barrel.
One key question facing OPEC is how non-member nations will respond. Oil experts anticipate higher production from the U.S., Canada, and Brazil, and Russia also holds plenty of cards in determining the future direction of oil prices. If shale plays remain economically viable, then OPEC needs to anticipate substantial production that’s out of its control, and that could make it difficult for the cartel to achieve its strategic goals over the long run.
Most analysts see OPEC walking a fine line between supporting oil prices while not allowing them to explode higher. By doing so, the cartel hopes that producers beyond its control won’t count on a big boom in making decisions to expand production capacity, while still giving its member countries enough cash flow to remain financially healthy.”
And then, in a late June podcast, O’Reilly and Muckerman talked about oil companies’ foray into renewable energy prospects:
“Muckerman: Well, Shell says that by the end of this decade, so by 2020, they’ll be investing a billion dollars per year in renewables. That pales in comparison to the $25 billion they spend every year. But going from nothing a few years ago to $1 billion by 2020, that’s a pretty good move.
And as you mentioned, Total, very serious about it. Statoil, big player in offshore wind, utilizing their offshore oil technology, and know how to operate in these rough environments, to then turn that into the ability to generate wind power offshore. So these companies are doing it. But having only $1 for every $5 spent on oil moved toward renewables —
O’Reilly: It seems low, doesn’t it?
Muckerman: It does seem low. If they spend $350 billion over the next 20 years, what Mackenzie says is, that will get wind and solar to 6.5% of total global energy production.
O’Reilly: That’s incredibly low.
Muckerman: Yeah, and they say over that same time period, they will likely spend $1.5 trillion on oil and gas.
O’Reilly: Man. I came in here wondering if there would be a time when we stop thinking of Exxon and Shell and everybody as oil and gas companies, and think of them as just energy companies. It seems to me like, with statistics like that, it’s a long way off.
Muckerman: Well, then, I think they said, wind and solar only account for about 1% of total energy this year. It’s 6x improvement, from 1 to 6.5.
O’Reilly: That’s over a fifth of a century, though.
Muckerman: Yeah, I know. But it’s only 1%, and the world has been around for Lord knows how long, so we’ve been producing energy from fossil fuels for quite some time. So, they have a step ahead.”