Low Oil Prices Take Toll; Oil Search Reports 30 per cent fall in Revenue While STO Declares Non-Cash Impairment

Summary

• In April 2020, the oil market came under tremendous pressure with prices of West Texas Intermediate oil even slipping below zero previously across the international front.
• The decline in oil prices due to weak demand has further exerted pressure on the financial position of many ASX-listed oil & gas stocks.
• The low price for oil has now finally taken shape in the form of a 30 per cent decline in quarterly revenue for Oil Search Limited (ASX:OSH) and a USD 700-800 million before tax non-cash impairment for Santos Limited (ASX:STO).

The oil market is moving under a consolidation with supply and demand scenario keeping balance, leading to a narrow range in trading of Brent Crude oil futures, which is hovering in the range of USD 42 to USD 44 a barrel.

However, while the market is under consolidation, many industry forecasters estimate that the oil market would witness improvement ahead in 2021 and 2022.

To Know More, Do Read: OPEC and Allies Ease Supply Cuts, Market Goes Range-Bound; Things You Should Know

In the wake of a brief plunge in oil prices, many ASX-listed oil stocks have seen a considerable sell-off on the exchange over the market estimation of falling earnings of such companies in the wake of oblique oil demand and weak prices.

Some of such ASX-listed oil stocks such as Oil Search Limited (ASX:OSH) are now reporting the June 2020 quarterly performance, which is briefly showing the impact of a considerable drop in oil prices.

Also Read: Oil Crisis: Should you Buy or Sell Some Oil Stocks?

Oil Search Reports 30 per cent Drop in Quarterly Revenue

• OSH disclosed the June 2020 quarter update and reported a loss of 30 per cent in the total revenue for the quarter against the previous corresponding period (or pcp) at USD 266.2 million.
• The revenue of the Company also took a hit of ~ 25.93 per cent against the March quarter.
• OSH generated a revenue of USD 625.6 million during the first half of the year, which remained 19 per cent down against pcp.

The drop in revenue was mainly due to lower average price on sales as on the production counter, OSH witnessed a strong quarter.

• OSH produced 7.29 million barrels of oil equivalent during the June 2020 quarter, which though remained a unit per cent down against the previous quarter but contributed towards a 4 per cent increase in the first-half production against pcp at 14.66 million barrels of oil equivalent.
• The Company managed to sell 6.79 million barrels of oil equivalent during the quarter, which remained a unit per cent down against the previous quarter.
• However, the first-half sales surged by 2 per cent to stand at 13.66 million barrels of oil equivalent.

Production and Sales Performance (Source: Company’s Report)

As mentioned above, a considerable drop in the average realised price on sales took a toll on revenue.

• OSH realised an average price of USD 23.05 per barrel, down by ~ 53.44 per cent against the previous quarter and down by ~ 66.43 per cent against pcp.
• Furthermore, the average realised price for the first half of the year remained ~ 15.34 per cent down against pcp at USD 8.22 per barrel.

Revenue and Average Realised Price (Source: Company’s Report)

Equity Raising and Liquidity

During the quarter, the Company completed an accelerated pro-rata non-renounceable entitlement offer, an institutional placement, and an offer to eligible PNG shareholders at $2.10 a share to raise USD 698.2 million, post netting against the transaction cost.

To Know More, Do Read: Oil Search Shifts the Paradigm from Just Cost-Saving to Capital Raising, Completes Institutional Placement

• At the end of the June quarter, OSH had liquidity of USD 1.67 billion, including USD 831.4 million in cash and rest in undrawn credit facilities.
• Furthermore, the Company had extended the expiry date of short-term bilateral facilities to 30 June 2021 of USD 300 million, which coupled with the recent capital raising has provided OSH with the ability to operate through an extended period of oil price weakness.

To Know More, Do Read: Oil Search and Caltex Encountering Weaker Price Challenge Amid Market Disturbance from IMO 2020 and Coronavirus

Liquidity Position (Source: Company’s Report)

Project Expansion and Development

• Post the suspension of the P’nyang Gas Agreement with the PNG Government and ExxonMobil at the end of January 2020; the Company held exploratory informal discussions with the PNG State to align fair and balance terms for all stakeholders.
• In May 2020, OSH completed the exploratory informal discussions leading to the re-engagement of PNG State and ExxonMobil on the P’nyang Gas Agreement.
• Furthermore, OSH completed the 2019/2020 exploration drilling program during the quarter and successfully plugged Mitquq and Stirrup wells.
• In the wake of low pricing environment, the Company decided to delay a Final Investment Decision on the Pikka Unit Development and commenced work.

Future Guidance

OSH reaffirmed the previous guidance of 27.5 to 29.5 million barrels of oil equivalent production for FY2020; however, this time mentioned that there would be a decline in the unit production cost from USD 11.00-12.00 per barrel to USD 10.00-11.00 per barrel.

OSH is not the only oil player, that felt the heat of the COVID-19 outbreak many other ASX-listed oil & gas players also witnessed large losses. For example- Santos Limited (ASX:STO).

Santos Announces USD 700-800 Million Non-Cash Impairment

STO announced that it anticipates a non-cash impairment of USD 700-800 million before tax or USD 490-560 million after-tax in the 2020 half-year results due to revised oil price assumptions resulting from the effects of the COVID-19 pandemic on energy market demand fundamentals.

• Furthermore, the Company mentioned that it would recognise non-cash impairments of GLNG of USD 640-700 million before tax and USD 60-100 million before tax in exploration assets, primarily in Cooper and Amadeus Basins.
• The capitalisation of non-cash impairments is further anticipated to increase earnings by ~ 1.5 per cent and the Company suggested that its debt covenants have sufficient headroom and are not under threat at current oil prices for a number of years.

To summarise, the COVID-19 outbreak had a considerable impact on the oil market, which in turn, has exerted tremendous pressure on the financial positions of many ASX-listed oil & gas players.

Oil Search announced a 30 per cent drop in its quarterly revenue despite a steady production for the period over a considerable decline in the average realised price.

Likewise, Santos Limited is now anticipating a non-cash impairment of USD 700-800 million before tax, which once capitalised in the half-year result would increase the gearing rate by 1.5 per cent.