Energy companies lose $1 trillion in value as crude price plummets
The oil and gas sector worldwide lost about $1 trillion in value during a 40-day period that began in early early October and culminated last week with a record 12th straight day of oil price declines — including the worst single-day drop in three years.
Crude prices in New York commodity markets slid more that 25 percent during that period, from a recent peak above $76 a barrel to less than $56, and took oil and gas stock prices with them. Energy stocks included in the S&P 500 Index shed nearly $240 billion in value during those 40 days; Exxon Mobil shareholders alone lost almost $35 billion on Wall Street. Norwegian research firm Rystad Energy estimates oil and gas firms worldwide lost about $1 trillion in asset values — almost a quarter of their worth.
“It’s certainly surprising and unexpected how quickly things shifted,” said Dan Pratt, executive director of upstream energy for the research firm IHS Markit. “Energy is a bit out of favor. It’s hard to see where people are getting excited about oil and gas.”
Stock market values matter greatly to energy firms, their investors and their employees, affecting companies’ ability to expand, hire and borrow money, which still drives the Greater Houston economy. For many tens of thousands of energy workers in the region, falling stock prices not only affect their job security, but also, for the many who hold their employers’ stock, the value of their portfolios and retirement plans, and confidence to spend on homes, autos and other goods and services
The excitement that followed the run-up of oil prices earlier in the fall has recently morphed into fear. This new stretch of losses, both in crude and stock prices, is the worst hit to the energy sector since the last oil bust, when crude collapsed from more than $100 a barrel in 2014 down to a low of about $26 in early 2016.
As in 2014, the issue is too much oil coming into the market. U.S. production has hit new records while OPEC and Russia have increased output — all against the backdrop of slowing economic growth and energy demand. Analysts now are focused on the Dec. 6 meeting of the Organization of the Petroleum Exporting Countries, when the cartel and its allies consider cutting production to reduce supplies and boost price.
The meeting is reminiscent of the one that ended on Thanksgiving 2014, when the cartel declined to take action aimed at reducing a burgeoning supply glut and sent prices into a freefall. Mike Bradley, managing director at the energy investment firm Tudor, Pickering, Holt & Co. in Houston, is optimistic OPEC members will agree to some type of reduction, but he’s far from certain.
“If they don’t cut,” he said, “ I guarantee you it’s going to be 2014 all over again.”
Best laid plans
So how did we get here?
Crude prices climbed earlier in the fall with sentiment expecting pipeline shortages to slow U.S. production, harsh sanctions to take most of Iran’s oil off the market, and continued unrest in Venezuela, Nigeria and Libya to reduce output and strain supplies.
Instead, U.S. oil production has kept surging, up to a projected record high of 11.7 million barrels a day while crude inventories have climbed by millions of barrels for eight consecutive weeks. U.S. sanctions on Iran have turned out less strict than advertised, with the administration granting waivers to the world’s biggest energy consumers, including China and India, while OPEC nations have boosted their output to offset declines from Venezuela and Iran.
Meanwhile, tariffs and rising interest rates are slowing global economic growth, which could curtail demand for oil.
These factors combined to rapidly swing oil market moods from bullish to bearish and left energy stocks particularly out of favor as overall financial markets have sold off in recent days on growth and interest rate worries. Since the oil bust ended, investors have largely remained lukewarm toward energy stocks, in part because of the increasing adoption of electric vehicles and renewable energy, and projections of oil demand peaking as soon as the next decade.
“When you’re one of the more unloved sectors, you tend to be the first guy sold,” Bradley said of energy stocks during the recent sell off.
During this recent 40-day span, Big Oil companies such as Exxon Mobil and Royal Dutch Shell each lost close to $35 billion in market capitalization value on Wall Street. The value of other global oil companies such as Chevron, BP and France-based Total each fell almost $20 billion.
All told, the oil majors have lost more than 10 percent of their stock market value in the recent rout.
Large, independent producers, such as Houston’s ConocoPhillips and EOG Resources, have shed an average of 18 percent of the their stock market value. Small and mid-sized oil companies lost about 30 percent of their Wall Street value, according to the research and consulting firm IHS Markit.
This is all poor timing for an energy sector just beginning to win back investors by reining in spending, increasing dividend payments to investors and buying back shares to boost stock prices.
Plenty of choices
On Thursday, The Woodlands exploration and production company Anadarko Petroleum said it would reduce its projected 2019 capital spending slightly from this year, while raising dividends and expanding its share buyback program.
That announcement came as Anadarko’s Wall Street value has plunged more then $7 billion, or about 20 percent, to $28 billion from $35 billion in early October. With prices then falling toward $55 a barrel, Anadarko Chief Executive Al Walker pledged the company could grow with oil near $50 a barrel.
ConocoPhillips has said it will control spending regardless of oil prices as its invests a larger share of its profits into dividends and share buybacks as opposed to the industry’s traditional model of expanding production at all costs. Investors want higher returns, ConocoPhillips CEO Ryan Lance said in a recent interview, and they if don’t get them in energy, they will turn to other sectors.
Lately, it seems they have.