Oil groups’ optimism shortlived as pressure mounts
With prices back down to about $45 a barrel, majors are reducing spending
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hen the price of oil rose above $50 a barrel in June, it looked like the worst was over for international oil companies. Few people expected a return to the industry’s $100 a barrel heyday, but steady recovery seemed under way.
Two months later, with prices back down to about $45 a barrel, that optimism has been extinguished.
The oil majors’ second-quarter results in recent weeks were mostly worse than expected, with sharp drops in profits, rising debts and gloomy outlooks.
As well as weak prices of crude oil and natural gas, margins for refined products are also being squeezed, as excess production and high storage rates ripple down the supply chain. BP said its refining margins in the second quarter were the lowest since 2010.
“The glut of crude oil has translated into a glut of refined product,” says Michele Della Vigna, co-head of European equity research at Goldman Sachs. “So the integrated oil majors are getting hit at both ends.”
In response, companies are once again reducing spending. Royal Dutch Shell, fresh from its £35bn takeover of BG Group, said capital expenditure this year would be 38 per cent less than the pair jointly invested as standalone companies in 2014.
Yet, cost cuts alone are not enough to defend shareholder returns. With the exception of Eni of Italy, all the oil majors have so far maintained their prized dividends — but they have had to increase borrowing to do so.
Shell’s net debt increased $5bn in the second quarter to a record $75bn. Simon Henry, chief financial officer, admitted the group’s debt to equity ratio was in danger of breaching its self-declared upper limit of 30 per cent.
“The fact that debts are creeping up shows that the majors are not able to fund their dividends organically at these prices,” says Tom Ellacott, head of corporate research at Wood Mackenzie, the energy consultancy.
A year ago, oil groups were talking about the need for a long-term break-even point of $60 a barrel. That was painful enough for an industry that had grown fat on prices twice that level. But companies are now acknowledging that even tougher action is required. BP, for example, is aiming to cover all its cash needs — including its dividend — at an oil price of $50-$55 a barrel by next year.
Analysts and industry executives say the squeeze is leading to a leaner, more productive industry. Tens of thousands of jobs have been cut, contracts have been renegotiated with service providers and engineering processes simplified. “We’re starting to see the benefits of projects being reworked with much improved economics,” says Mr Ellacott.
These efficiency gains are lowering the potential cost of new oil and gasfields. Of the 13m barrels a day of proven but untapped resources available for development, the average break-even point has fallen $19 a barrel since the 2014 peak to $51, according to Wood Mackenzie.
There have been tentative signs of lower costs giving companies confidence to resume the hunt for future growth.
“There’s a tricky balancing act between cutting costs to achieve cash flow neutrality while at the same time looking to the long term,” says Mr Ellacott. “We are seeing the majors trying to reposition their portfolios to the most attractive and lowest cost growth opportunities.”
In the past two months, BP has approved projects in Indonesia and Egypt, while Chevron gave the green light to a $37bn expansion of the Tengiz oilfield in Kazakhstan.
There has also been a burst of acquisitions, with ExxonMobil and Statoil each striking $2.5bn deals in recent weeks to buy InterOil , an exploration company focused on Papua New Guinea, and a controlling stake in a Brazilian offshore oilfield from Petrobras, respectively.
However, these acquisitions are dwarfed by the disposal programmes under way to raise cash. Shell alone is looking to raise $30bn by 2018 from sales of non-core assets. Investment activity also remains far below pre-crash levels. From 2007-2013, there were on average 40 large projects — defined as having reserves of 50m barrels of oil equivalent or more — approved each year. In 2015, there were just eight and so far this year there have been six.
Oil bulls believe these cuts will eventually lead to tighter supplies and drive recovery in prices and investment. Wood Mackenzie calculates that more than 20m barrels a day of new capacity needs to be developed by 2025 to offset production declines from existing fields and to meet future demand growth.
Some analysts doubt the arguments for cyclical recovery, pointing out that output from the Opec nations remains close to record highs while US shale production could be quickly intensified if the market tightens. Mr Della Vigna at Goldman Sachs believes oil is facing a “deflationary spiral” with plentiful supplies forcing the industry to become more efficient, which in turn leads to further increases in production at lower costs.
This analysis leads Mr Della Vigna to argue that the sacrifices being made by oil majors to defend dividends may be in vain. “They inflated their dividends in a high oil price environment and now cheap debt and disposals are propping them up. They’ve done enough to keep it going for a couple more years but, longer-term, they are going to have to review their payouts.”
CFO: Board will be reviewing dividend policy later this year - investor conf comments - Expec to focus on project pipeline but M&A remains an option
Gapping down
In reaction to disappointing earnings/guidance:
In reaction to disappointing earnings/guidance:
- CNXR -35%, DRYS -29%, IPXL -26.4%, TUBE -23.1%, MODN -20.1%, MXL-15.1%, W -14.9%, FSTR -14.7%, CAS -11.6%, CMT -10%, HRI -9.7%, MTW-9.3%, ROG -8.9%, NCLH -8.2%
- VTTI -8%, (also VTTI Energy Partners to acquire an additional 8.4% equity interest in VTTI MLP B.V. and associated pro-rata net debt from VTTI MLP Partners B.V. for cash consideration of $96.2 mln; commences 5.25 mln public offering of common units representing limited partner interests in the Partnership )
- NPTN -6.7%, RRGB -5%, (also announces that Denny Marie Post has been appointed as CEO and to the board, effective August 8 2016 ), BOJA-4.8%, GPS -4%, (Gap reports July same store sales -4.0% vs -3.6% Retail Metrics consensus and issues Q2 guidance)
- EVEP -3.8%, NEWT -3.3%, SNI -3.3%, JPEP -3.1%, LC -3.1%, (also CFO Dolan stepping down), MNKD -3%, KITE -3%, AER -2.8%, ARLZ -2.8%, USFD-2.6%,
- COH -2.3%, NUAN -2%, DVA -1.8%, ARNA -1.8%, HTZ -1.7%, FNV -1.1%
Other news:
- TWER -19.4% ( files for $20 mln common stock offering )
- FCSC -19.4% ( to offer and sell shares of its common stock and related warrants to purchase shares of its common stock in an underwritten public offering)
- ARRY -11.2% (Array's partner AstraZeneca provides update on Phase III trial of Selumetinib in non-small cell lung cancer; study did not meet its primary end point)
- IAG -8.6% (IAMGOLD to sell, on a bought deal basis, 38.85 mln common shares at a price of $5.15/share, for aggregate gross proceeds of ~$200 mln; commences cash tender offer for up to $150 million of its 6.75% Senior Notes due 2020)
- VTTI -7.9% (prices 5.25 mln common units representing limited partner interests in the Partnership for total gross proceeds of ~ $101.3 mln or ~$19.30/share), FOXF -6.2% (Fox Factory Holding announces that an existing stockholders intends to offer for sale an aggregate of 3.5 mln shares of the Co's common stock in underwritten secondary offering )
- PSXP -5% ( announces an underwritten public offering of 6 mln common units )
- ACAD -4.2% ( to offer and sell $200 mln of its common stock in an underwritten public offering )
- X -3.8% ( commences 17 mln common stock offering)
- BGS -3.7% (prices 3.75 mln common stock offering at $49.00/share)
- TSE -3% (Trinseo announces that Bain Capital Everest Manager Holding has agreed to sell 8 mln ordinary shares pursuant to its shelf registration statement)
- BMRN -3% (files mixed securities shelf offering; commences 7.5 mln common stock offering)
- WING -2.6% (announces that a stockholder, namely an affiliate of Roark Capital, intends to offer for sale in an underwritten secondary offering 6 mln shares of the co's common stock )
- AZN -1.1% (provides update on Phase III trial of Selumetinib in non-small cell lung cancer; study did not meet its primary end point)
- AKR -1% ( announces sale of 4.2 mln common shares )
- SAVE -0.8% (reports July prelim traffic; RPMs +18.4% Y/Y on ASMs +17.1% Y/Y, load factor for July 2016 was 89.8%, +1%)
Analyst comments: AV -1.4% (downgraded to Neutral from Outperform at Macquarie)
Gapping up
In reaction to strong earnings/guidance:
In reaction to strong earnings/guidance:
- HIIQ +39%, ALDX +27.6%, FH +17.1%, (also FORM Holdings to acquire 100% of XpresSpa through a private placement of its common stock to Mistral Equity Parterns and other existing XpresSpa holders at $2.31/share or $1.73 mln), REN +12.7%, WAC +11.8%, ENDP +11%, CSLT +10.6%, WPRT +10.1%
- AMPH +9.4%, VSLR +8.8%, CASC +8.3%, NVRO +7.5%, GIGA +6.5%, (also receives a $1.9 mln order for non-recurring engineering services associated with its Microsource business unit from an aerospace company), KNDI +6.5%, ATSG +6.3%, ATSG +6.3%, EGY +6.2%, EGY +6.2%, MIME +5.9%, HEAR+5.5%, (thinly traded), AMAG +5.4%, MCHP +5.3%, (also increased quarterly cash dividend to $0.36/share from $0.3595/share), LGIH +5.2%, BDSI +5%
- CPE +4.7%, OPK +4.3%, IDI +4.1%, (also annouces Harry Jordan as COO), SIEN +4.1%, EGRX +3.9%, NILE +3.8%, WBMD +3.5%, WBMD +3.5%, INCY+3.5%, ZBRA +3.5%, MSTX +3.5%, ZLTQ +3.3%, FGEN +3.2%, OCUL +3.1%, AMID +3%
- DQ +2.7%, IONS +2.6%, RSPP +2.4%, CECE +2.2%, IPHI +2%, IFF +1.7%, TWLO +1.5%, ELNK +1.3%, CLVS +1.3%, FSC +1.2%, EXC +1.1%, FSM +1%
M&A news: MWW +22.4% (to be acquired by Randstad Holding (RANJY) for $3.40 per share; also reported earnings), .
Other news:
Other news:
- ALDX +27.2% (reports 'positive' data from a clinical trial of NS2)
- MESO +16.6% (thinly traded - Phase 2 trial results of Mesoblast's cell therapy show dose-related improvements in biologic refractory rheumatoid arthritis)
- SPEX +14.9% (enters into a non-binding letter of intent to invest in DatChat in exchange for an equity security interest in DatChat)
- VRX +6.4% (announces relaunch of generic Ofloxacin Otic solution, also reported earnings)
- WPZ +4.7% (Williams and Williams Partners announced they have agreed to sell the companies' Canadian businesses to Inter Pipeline Ltd. for combined cash proceeds of $1.35 billion CAD)
- CPS +3.9% (S&P announces Cooper-Standard Holdings will replace QLogic Corp. (QLGC) in the S&P SmallCap 600 after the close of trading on Wednesday August 10
- PSTI +2.6% (announces that its critical limb ischemia program in the EU has been awarded an $8 mln grant)
- AAL +2.6% (reports July and year-to-date 2016 traffic results)
- NVO +1.7% (still checking)
- BSX +0.5% (receives FDA approval for the EMBLEM MRI Subcutaneous Implantable Defibrillator System)
Analyst comments:
- VALE +0.8% (upgraded to Equal Weight from Underweight at Morgan Stanley)
- CVX +0.6% (upgraded to Overweight from Neutral at Piper Jaffray)
US Productivity Plunges For 3rd Quarter In A Row - Longest Losing Streak Since 1979
Following the Q2 GDP print, the slowing in aggregate weekly hours suggested a modest pickup QoQ in non-farm productivity, but it plunged 0.6% - dramatically missing the +0.4% exp in this preliminary Q2 report. This is the 3rd quarterly decline in a row - the first time that has happened since 1979. This three quarter plunge is the biggest drop in productivity since 1993, and this is the first YoY drop (-0.4%) since Q2 2013. All in all... a disaster!
Third quarterly decline in a row...
As productivity drops at fastest rate since 1993!!
As Fed-induced investment in buybacks crowds out capex, real-worker productivity is collapsing (but buy back productivity is soaring!!).
* * *
How can this be?? The mainstream media 'economists' are stunned. As we explained previously, there are a few reasons... Even Alan Greenspan has warned that America is "in trouble basically because productivity is dead in the water..." There are numerous reasons for this plunge in worker-productivity, from perverted inventives not to work to unintended consequences of monetary policy enabling zombies, but perhaps the most critical driver is exposed in the following dismal chart...
51% of total time spent on the Internet is on mobile devices - in 2015, first time ever mobile is #1 - to make a total of 5.6 hours per day snapchatting, face-booking, and selfying...
Source: @kpcb
So, while every effort can be made by Ivory Tower academics to solve the problem of American worker productivity, perhaps it can be summed up simply as "Put The Smart-Phone Down!"
As we detailed previously, adjusting for the WWII anomaly (which tells us that GDP is not a good measure of a country’s prosperity) US productivity growth peaked in 1972 – incidentally the year after Nixon took the US off gold.
The productivity decline witnessed ever since is unprecedented. Despite the short lived boom of the 1990s US productivity growth only average 1.2 per cent from 1975 up to today. If we isolate the last 15 years US productivity growth is on par with what an agrarian slave economy was able to achieve 200 years ago.
In addition, the last 15 years also saw an outsized contribution to GDP from finance. If we look at the US GDP by contribution from value added by industry we clearly see how finance stands out in what would otherwise have been an impressively diversified economy.
With hindsight we know that finance did more harm than good so we can conservatively deduct finance from the GDP calculations and by doing so we essentially end up with no growth per capita at all over a timespan of more than 15 years! US real GDP per capita less contribution from finance increased by an annual average of 0.3 per cent from 2000 to 2015. From 2008 the annual average has been negative 0.5 per cent!
In other words, we have seen a progressive (pun intended) weakening of the US economy from the 1970s and the reason is simple enough when we know that monetary policy broken down to its most basic is a transaction of nothing (fiat money) for something (real production of goods and services). Modern monetary policy thereby violates the most sacred principle in a market based economy; namely that production creates its own demand. Only through previous production, either your own or borrowed, can one express true purchasing power on the market place.
The central bank does not need to worry about such trivial things. They can manufacture the medium of exchange at zero cost and express purchasing power on the same level as the producer. However, consumption of real goods and services paid for with zero cost money must by definition be pure capital consumption.
Do this on a grand scale, over a long period of time, even a capital rich economy as the US will eventually be depleted. Capital per worker falls relative to competitors abroad, cost goes up and competitiveness falls (think rust-belt). Productive structures cannot be properly funded and the economy must regress to align funding with its level of specialization.
In its final stage, investment give way for speculation, and suddenly finance is the most important industry, pulling the best and brightest away from every corner of the globe, just to find more ingenious ways to maximise capital consumption.
As the slave economy got perverted by incentives not to work, so does the speculative fiat based economy, which consequently create debt serfs on a grand scale.
Early premarket gappers
Gapping up: HIIQ +40.8%, ALDX +27.7%, MWW +22%, REN +17.2%, MESO +16.6%, FH +14.3%, VSLR +11.3%, ALDX +11.1%, CSLT +9.4%, AMPH +9.4%, NVRO+9.3%, CASC +8.3%, ENDP +7.8%, VRX +7.4%, GIGA +6.5%, ATSG +6.3%, EGY +6.2%, KNDI +6.1%, MIME +5.9%, BDSI +5.9%, HEAR +5.5%, SINA +4.9%, WPZ+4.7%, CPE +4.7%, ZLTQ +4.5%, MCHP +4.4%, OPK +4.4%, IDI +4.1%, NILE +3.8%, WLL +3.4%, INCY +3.4%, FGEN +3.2%, ZBRA +3.1%, AMID +3%, CPS +2.9%,RSPP +2.4%, FSC +2.1%, IPHI +2%, MT +1.5%, IONS +1.5%, NVO +1.3%, IFF +1.3%, CLVS +1.3%, LGIH +1.3%, BP +0.9%, TOT +0.9%, NUAN +0.6%
Gapping down: TUBE -24.4%, CNXR -23.2%, MODN -16.4%, MXL -15.5%, NPTN -15%, TWER -14.3%, MTW -13.6%, FCSC -12.4%, ARRY -11.2%, DRYS -9.8%,ROG -8.9%, W -8.3%, IAG -7.7%, VTTI -7%, GPS -6.2%, BOJA -5.5%, RRGB -5%, ELNK -4.5%, ACAD -4.3%, TSE -3.9%, BMRN -3.8%, COH -3.5%, NEWT -3.3%,JPEP -3.1%, MNKD -3%, KITE -3%, X -2.9%, DVA -2.9%, WING -2.8%, AER -2.8%, GWPH -2.5%, BGS -2.3%, RAX -2.1%, PSXP -2%, LC -1.9%, ARNA -1.8%, HTZ-1.7%, IPXL -1.6%, TWLO -1.4%, AZN -1.2%, SM -1.1%, FNV -1.1%, GSK -1%, SAVE -0.8%, TTNP -0.8%, RIO -0.7%
Gapping down: TUBE -24.4%, CNXR -23.2%, MODN -16.4%, MXL -15.5%, NPTN -15%, TWER -14.3%, MTW -13.6%, FCSC -12.4%, ARRY -11.2%, DRYS -9.8%,ROG -8.9%, W -8.3%, IAG -7.7%, VTTI -7%, GPS -6.2%, BOJA -5.5%, RRGB -5%, ELNK -4.5%, ACAD -4.3%, TSE -3.9%, BMRN -3.8%, COH -3.5%, NEWT -3.3%,JPEP -3.1%, MNKD -3%, KITE -3%, X -2.9%, DVA -2.9%, WING -2.8%, AER -2.8%, GWPH -2.5%, BGS -2.3%, RAX -2.1%, PSXP -2%, LC -1.9%, ARNA -1.8%, HTZ-1.7%, IPXL -1.6%, TWLO -1.4%, AZN -1.2%, SM -1.1%, FNV -1.1%, GSK -1%, SAVE -0.8%, TTNP -0.8%, RIO -0.7%
Valeant Pharma: Notes from presentation -- Call just started, already in Q&A
- Slower recovery in dermatology in Q2.
- Sees acceleration at Salix.
- Fixed dermatology issues at Walgreens:
- Restored net profitability to new dermatology prescriptions
- Aug 5 Launched coupon for independent pharmacies
- June 27 Launched new prior authorization program at Walgreens
- Aug 4 Xiafxan trx +28% vs. +32% in Q1; other Salix brands also growing
- Co unveils new strategy with new segments:
- Bausch + Lomb Intl (vison, surgical, consumer, opthamology: 50% of rev): Durable Growth: Sees rev +6-8%, EBITDA +8-12% through 2018
- Branded RX (Salix, derm, Dendreon: 30% of rev): sees rev +5-10%, EBITDA +7-10% through 2018
- US diversified (neuro, generics, solta, obagi 20% of rev): sees rev down 20%, EBITDA down 25% through 2018 due to generics.
- Balance sheet:
- 2016: Committed to minimum permanent debt pay down of $1.7B
- Cash flow available for debt repayment and other purposes expected to increase in 2017.
- Expect free cash flow and non-core asset sales to reduce debt by more than $5B over 18 months.
- Evaluating strategic alternatives for a number of non-core businesses and geographies that represent revenue greater than $2B.
- Received interest in $8 bln in non core assets
VRX +6% premarket
American Superconductor beats by $0.28, misses on revs; guides Q2 EPS below consensus, revs below consensus
- Reports Q1 (Jun) loss of $0.64 per share, excluding non-recurring items,$0.28 better than the Capital IQ Consensus of ($0.92); revenues fell 43.9% year/year to $13.3 mln vs the $13.52 mln Capital IQ Consensus.
- The year over year decrease in revenues was largely due to lower Wind segment revenues during the first quarter of fiscal 2016.
- 43% of total company revenue came from its Wind segment, while 57% came from its Grid segment.
- Co issues downside guidance for Q2, sees EPS of less than ($0.88) vs. ($0.53) Capital IQ Consensus Estimate; sees Q2 revs of $16-18 mln vs. $22.63 mln Capital IQ Consensus Estimate.
Rackspace [RAX] Beats Estimates; Does Not Comment on Takeover Interest
Shares of Rackspace (RAX 28.50, -0.11) are on track to open lower by 0.4% even though the company beat earnings estimates and issued upbeat guidance. The earnings release did not include commentary about takeover interest, which has been reported earlier this month.
The provider of cloud computing services reported above-consensus earnings of $0.28 per share on a 7.0% increase in revenue to $523.60 million, which was also ahead of estimates. Currency exchange rates and the sale of the company's Jungle Disk business impacted the revenue growth rate by 190 basis points.
Net income ($35.80 million) accounted for 5.8% of net revenue after making up 7.0% of revenue in the same quarter a year ago ($28.30 million). Net income margin improved to 6.8% from 5.8%. Income from operations represented 12.3% of net revenue, up from last year's 8.6%.
Capital expenditures totaled $82.10 million, which was up sequentially, but down more than 45.0% year-over-year.
Free cash flow totaled $98.40 million, which was up from $36.80 million in the same quarter last year.
In addition to reporting earnings, Rackspace announced the sale of its Cloud Sites business unit to Liquid Web, but terms of the transaction were not disclosed.
Going forward, Rackspace expects to generate third-quarter revenue between $534 and $539 million, which is ahead of market expectations. Full-year revenue is expected between $2.13 and $2.15 billion, which is also ahead of estimates.