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Low Oil Price Hits Players’ Balance Sheet

Players across the full spectrum of global petroleum industry are counting financial losses following the sharp drop in the export prices of crude oil and natural gas, leading to acute spending strictures and poor financial results. The disappointing market returns from costly investments made at a time of high oil price, apart from directly affecting capital and operating expenditures, cast gloom on the impending second quarter results and short to medium term financial health of the companies.

The situation, according to industry analysts, has also diminished to capacity of even the world’s biggest energy companies to meet their commitments to shareholders, financial and sundry service providers, leaving the industry with massive debt overhang. In Nigeria where numerous small players rode on the wave of high oil prices to float operations, the financial performance outlook is weak as the oil price burst combine with a plethora of other problems in the operating environment to post gloomy balance sheet.

The negative impact of the global crude oil price crash on the Nigerian capital market for the first half of the year 2015 reflected in the value of oil companies as shares dropped by N273.44 billion or 25.83 per cent from the corresponding period of 2014. A review of the performance of the oil and gas sector on the Nigerian Stock Exchange (NSE) shows that the petroleum sector recorded N786.56 billion in the six month period ended June 2015 as against N1.06 trillion in the first half of 2014.

In the first half of the year, the NSE oil and gas index dropped by 21.2 per cent to close at 368.54 points from 468.24 points in the corresponding period of 2014. The drop in the NSE oil and gas index is a reflection of the fall in the prices of petroleum equities, and the level of the financial performance of oil firms across the full industry loop.

The challenge has compelled investors to either sell off their oil and gas stocks or adopt a wait and see attitude. The equities that indicated fall in earnings include Beco Petroleum Product, Conoil, Eterna, Forte Oil, Mobil Oil Nigeria, MRS Oil Nigeria, Total Nigeria, Oando and Seplat Petroleum Development Company. The oil and gas sector accounted for 7.12 per cent of the equity market capitalisation for the first half of 2015 as against 7.56 per cent in the corresponding period of 2014.

Leading indigenous independent producer with dual listing on the Lagos and London equity markets, Seplat Petroleum Development Company Limited, posted a 79n percent drop in profit for the first half of the year following the cascade in crude oil prices. Managing Director, Mr. Austin Avuru, stated in a chat with The UNION that sharp drop in oil price constituted a major drain on the company’s earnings. “Recall that by this time last year, we were hit by three critical buckets or headwinds.

So we started seeing oil prices that were half of what they were. If you look at our gross revenue, it is revenue of $248 million as against $388 million recorded last year. Again, that is due to oil price differences,” he explained. Seplat’s peer competitor that is also listed in the London Stock Exchange, AfrenPlc, has been shattered by oil price adversity.

Riding on the surf of high oil prices, Afren drove bullish assets acquisitions across Africa with debt funds which can longer be serviced under the current market realities. The company is currently at the mercy of key creditors and very few rescue windows are open. Mart Resources which is another publicly listed company in the Nigerian turf appears to be losing its glow as key performance driver, and has offered to be acquired by its partners in the Umusadege   marginal field, Midwestern Oil and Gas Company Limited, even though the deal faces a flop on the same reason of poor capital flow. Indigenous energy giant, Oando, which has its tentacles across the full business loop in the industry commands attention as shareholders await its second quarter result but analysts don’t expect miracle given the prostrate state of the Nigeria’s operating environment which has shaped the fate of all players.

The company which has a record of posting very audacious bottom lines in the past may have a different story for shareholders and industry observers who already understand the obvious implications of poor market returns and hostile environment on the balance sheet. Other numerous players in the domestic environment who are not obligated to public disclosure are also battling gruesome financial difficulties as the current returns on meagre production volumes developed at high cost can no longer support the cost of funding. Investigations by The UNION shows that most of the promoters of marginal field operations in the country are fighting for renegotiation of funding terms with banks and sundry loan syndicates. Oswald Clint, an analyst at Sanford C. Bernstein & Co. LLC, said in a note to clients that crude producers have seen profit eroded by a 50% slump in prices over the past year amid a global oversupply.

Managing Director of ERHC Energy, Mr. Peter Ntephe, stated that the impact of the oil price crash did not spare any company big or small. “Oh, it hit our share price badly, and what we have done is to chart our sharp drop in valuation against what we call our peer companies and they are virtually all the same. It hit us in the same proportions. We all come from different places but there is the same proportional downward movement is that we all have suffered. “So, at least we can console ourselves that the market didn’t punish us worse than it punished our peers. It is just that same group range that all of us have,” he pointed out.

Also, after looking at the company’s performance amidst a myriad of setbacks associated with oil price crash and operational challenges in the domestic environment Mr. Avuru declared that it was a wonder that Seplat made profit at all. According to him, “the very positive side of it is that we made profit at all.” Meanwhile, the global price of crude oil from January 2015 to August 10, 2015 has revealed a steady fluctuation. The prices for January was $48, February $54, March $52, April-$57, May $62, June $60, July $54, and August $48.

The prevailing financial crisis in the industry is a product of unplanned shift from high cost-high price industry phase to a low price-high cost phase as market oversupply mount pressure on prices of energy commodities produced at high cost. The UNION reports that oil prices reached an all-time high in July 2008 of $147 per barrel on the New York Mercantile Exchange (NYMEX) in response to market sentiments about threats to supply arising from the Middle East, Nigeria and Brazil.

Within the period, Israeli war planes practiced over Iraq, and Iran tested missiles capable of reaching Israel, and the resulting tension threatened to spark off a war that could block the Strait of Hormuz, the shipping lane for a fifth of the world’s crude. Meanwhile, oil workers were planning a strike offshore Campos Basin which holds 80% of Brazil’s oil production, and the Nigerian militant group MEND declared it would resume attacks on oil facilities in the Niger Delta region.

These threats sparked a race for supply security but the following price spike was not supported by   new demand or fundamental basis. Actual and sustainable increase in demand is normally associated with economic performance of consumer nations. Investors and market analysts had predicted stronger prices, whipping up sentiments that spiked bullish deals and audacious capacity expansion budgets as producers entered the race to draw as much revenue from the market as possible. Naturally, the price boom pulled up the cost of operations as service providers, technology developers and equipments manufacturers all marked up their values.

“I am holding on to my oil ETF’s and my energy trusts, and awaiting subsequent resistance levels of $150, $180, and $200 to be broken. Oil is in a bull market, and the bull is galloping away,” a market analyst had predicted. According to former Venezuelan oil minister and Director of Global Pacific and Partners, Dr. Alirio Para, the oil price swelled and stretched like a balloon, misleading investors into further risk exposures before a sudden burst. Although all seasoned investors in the sector are not oblivious of the cyclical nature of the prices at the petroleum exchanges, the sudden burst and resulting steep plunge experienced since the last quarter of 2014 took the shape of a phenomenon, a deviation from the normal slant process that affords industry captains time for seamless shift in strategy.

“Recall that by this time last year, we were hit by three critical buckets or headwinds. So we started seeing oil prices that were half of what they were,” declared the Managing Director of Seplat Petroleum Development Company Limited, Mr. Austin Avuru, whose company’s profit in the first half of 2015 plunged by nearly 80 percent from 2014 levels.

Managing Director of ERHC Energy, Mr. Peter Ntephe, whose company is seeking renegotiation of production contracts in operated offshore acreages in the Gulf of Guinea, also referred to the slump in oil prices, saying, “we have experienced a downturn where the oil prices has gone down from over $140 per barrel for Brent to a stage where we are fearing that it might fall below $40 per barrel.” Meanwhile, the high cost of oil, though celebrated by producer countries and companies for the revenue windfall, concealed inherent trait for self deflation: it accelerated measures by key consumer nations to evolve alternative sources of supply; and provided commerciality to exploitation of previously costly unconventional shale resources and tar sands.

Thus, with unlocking unconventional oil and gas in North America, Europe and Asia, previously overlooked shale and tar sand reserves witnessed rapid and massive development and production activities that not only addressed global demand concerns but also propelled supply glut in a thinner market as North America suddenly attained self sufficiency. The resulting scramble by producers for limited market shares also compelled a race for production boost and discounts that further weakened prices in a turgid market. So, the price headwind which hit the industry in the second half of 2014 saw prices plummet from a range above $100 per barrel to levels below $50 per barrel, shaking the entire industry and setting off a wave of panic among companies.

By the end of January 2015, hopes of price recovery waned when the price of north sea oil due to be delivered in February 2015 was for sale at $45.74 per barrels in London. The price of WTI crude oil fell even more and was sold at less than $45 per barrel. Analysts at Goldman Sachs predicted that the price of American crude oil could go all the way down to $39 per barrel in by July, adding that the North Sea oil would also continue to decrease due to a saturated market.

The failure of oil price to show reliable signs of significant recovery since the beginning of the year has been disastrous: stripping profitability from recently concluded investments, wiping commerciality off lean assets and slicing returns from commodities produced at high cost. The reflection of these adverse impacts on industry operations is visible in the financial results of the players across the industry business chain. Italy’s biggest oil firm, Eni, reported 84 percent profit drop in its second quarter results declared to disappointed but patient shareholders.

EniSpA said second-quarter profit dropped 84% as its oil-and-gas contractor unit Saipem booked $1 billion in writedowns earlier this week after a plunge in crude prices. BP Plc reported the lowest quarterly profit in at least 10 years after a boom in trading faded and the conflict in Libya forced almost $600 million of writedowns. Royal Dutch Shell similarly announced that its second quarter 2015 earnings were $3.8 billion compared with $6.1 billion for the second quarter 2014, and after referring to several notes and exceptions the company puts its 2015 figures at decrease of 37 percent. Chevron posted a massive year-on-year drop in reported earnings for second quarter. The company reported $571 million earnings compared to $5.7 billion recorded for second quarter 2014. CEO, John Watson, explained that the company’s upstream business swung to a net loss of $2.22 billion from a profit of $5.26 billion.

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