Confronted with a dizzying drop in prices, oil firms face a real challenge as they try to cut investment spending in order to survive a coronavirus-induced collapse in demand coupled with a Russia-Saudi Arabia price war.
Investment in oil exploration and production was set to hit just over half a trillion dollars this year according to the French research body IFPEN, as firms sought to maintain and expand output.
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But the emergence of the coronavirus, which has seen nations across the world confine citizens at home and shutter businesses to slow its spread, has upended all forecasts.
The International Energy Agency, which advises oil-importing nations on energy policy, now expects the first annual drop in oil demand since 2009 during the global financial crisis, as the global economy tips into recession.
The main international benchmark, Brent crude, has fallen from just shy of $60 per barrel to under $25 this week, before regaining some lost ground.
The main US benchmark, WTI, tumbled from nearly $54 to just over $20.
Not all of the drop is due to the coronavirus.
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The price of oil had been supported for the past couple of years by production limits agreed by the OPEC oil cartel led by Saudi Arabia and a number of other producers including Russia.
However Russia and Saudi Arabia failed to agree earlier this month on deeper cuts to take account of falling demand due to the coronavirus pandemic.
Saudi Arabia subsequently slashed prices and announced it would boost output and Russia followed suit, leading to the vertiginous drop in prices.
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– Cut and shift –
“All companies in the sector will be seeing what more they can do to cut costs, shift their activities to the lowest cost fields they can, trim investment and think hard about what dividend they can pay,” said Professor David Elmes at Warwick Business School.
While reducing investment is relatively easy in the near term, the longer prices remain low the more firms will need to look at shutting down production that is more expensive, such as offshore.
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“For the majors, the prospect of $30 per barrel of oil or below for a period of time is an extreme challenge,” said Biraj Borkhataria, an analyst at RBC Capital Markets.
He said that if these prices persist more than six months, then oil majors would need to cut into the generous dividends they pay — which is why they are prized by many investors — and that prospect has already been partly incorporated into their share prices.
– ‘Unprecedented’ –
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Saudi Aramco says it will cut investment to $25-$30 billion this year, a modest drop on the $32.8 billion it spent last year.
“Based on this unprecedented environment, we are evaluating all appropriate steps to significantly reduce capital and operating expenses in the near term,” said Exxon Mobil Corporation’s chief executive Darren Woods.
British oil major BP is targeting a 20 percent drop in spending this year, its chief financial officer Brian Gilvary said in an interview on Bloomberg television.
There are also many smaller oil companies who may struggle.
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“The medium-sized independent companies will be hit hard,” said Moez Ajmi at auditing firm EY in France.
“Decisions will be taken to delay projects and we’ll see restructurings of debt.”
The boom in shale oil production made the United States the world’s top producer and even a net exporter, but the industry is fragile.
Many of the independent shale firms have been built on debt and even before the drop in prices had trouble turning a profit, according to analysts.
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– Poor returns –
Environmental activists can barely hide their joy at the difficulties the oil industry faces.
“We consider it is pretty much good news considering that these (exploration and development) projects shouldn’t see the light of day given the urgency of climate change,” said Cecile Marchand of the French chapter of Friends of the Earth.
She acknowledged abandoning these projects may not be permanent unless major political and economic policy changes are made.
Marchand also warned of the risk of “a concentration of the market in the hands of the majors who are more resilient that the small firms.”
Elmes at Warwick Business School said some positive outcomes were also possible.
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The European oil and gas majors have already indicated they intend to reduce their reliance on these fuels and become more active in renewables such as wind and solar.
“There will be intense discussions on what they can do to move faster,” he said.
The industry as a whole may also find it is no longer the darling of investors.
“Bankers will throw up their hands and bend to the pressure from institutional investors now demanding transparency for the emissions associated with their investments,” said Elmes.
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“The profitability of the oil and gas sector used to be attractively high but now it has the worst return over the last five years across 33 different industries,” he noted.
TOKYO (AP) — Japanese technology group SoftBank swung back to profitability in the July-September quarter, boosted by positive results in its Vision Fund investments.
Tokyo-based SoftBank Group Corp. reported Tuesday a fiscal second quarter profit of nearly 1.18 trillion yen ($7.7 billion), compared with a 931 billion yen loss in the year-earlier period.
Quarterly sales edged up about 6% to nearly 1.77 trillion yen ($11.5 billion).
SoftBank credited income from royalties and licensing related to its holdings in Arm, a computer chip-designing company, whose business spans smartphones, data centers, networking equipment, automotive, consumer electronic devices, and AI applications.
The results were also helped by the absence of losses related to SoftBank’s investment in office-space sharing venture WeWork, which hit the previous fiscal year.
WeWork, which filed for Chapter 11 bankruptcy protection in 2023, emerged from Chapter 11 in June.
SoftBank has benefitted in recent months from rising share prices in some investment, such as U.S.-based e-commerce company Coupang, Chinese mobility provider DiDi Global and Bytedance, the Chinese developer of TikTok.
SoftBank’s financial results tend to swing wildly, partly because of its sprawling investment portfolio that includes search engine Yahoo, Chinese retailer Alibaba, and artificial intelligence company Nvidia.
SoftBank makes investments in a variety of companies that it groups together in a series of Vision Funds.
The company’s founder, Masayoshi Son, is a pioneer in technology investment in Japan. SoftBank Group does not give earnings forecasts.
Shopify Inc. executives brushed off concerns that incoming U.S. President Donald Trump will be a major detriment to many of the company’s merchants.
“There’s nothing in what we’ve heard from Trump, nor would there have been anything from (Democratic candidate) Kamala (Harris), which we think impacts the overall state of new business formation and entrepreneurship,” Shopify’s chief financial officer Jeff Hoffmeister told analysts on a call Tuesday.
“We still feel really good about all the merchants out there, all the entrepreneurs that want to start new businesses and that’s obviously not going to change with the administration.”
Hoffmeister’s comments come a week after Trump, a Republican businessman, trounced Harris in an election that will soon return him to the Oval Office.
On the campaign trail, he threatened to impose tariffs of 60 per cent on imports from China and roughly 10 per cent to 20 per cent on goods from all other countries.
If the president-elect makes good on the promise, many worry the cost of operating will soar for companies, including customers of Shopify, which sells e-commerce software to small businesses but also brands as big as Kylie Cosmetics and Victoria’s Secret.
These merchants may feel they have no choice but to pass on the increases to customers, perhaps sparking more inflation.
If Trump’s tariffs do come to fruition, Shopify’s president Harley Finkelstein pointed out China is “not a huge area” for Shopify.
However, “we can’t anticipate what every presidential administration is going to do,” he cautioned.
He likened the uncertainty facing the business community to the COVID-19 pandemic where Shopify had to help companies migrate online.
“Our job is no matter what comes the way of our merchants, we provide them with tools and service and support for them to navigate it really well,” he said.
Finkelstein was questioned about the forthcoming U.S. leadership change on a call meant to delve into Shopify’s latest earnings, which sent shares soaring 27 per cent to $158.63 shortly after Tuesday’s market open.
The Ottawa-based company, which keeps its books in U.S. dollars, reported US$828 million in net income for its third quarter, up from US$718 million in the same quarter last year, as its revenue rose 26 per cent.
Revenue for the period ended Sept. 30 totalled US$2.16 billion, up from US$1.71 billion a year earlier.
Subscription solutions revenue reached US$610 million, up from US$486 million in the same quarter last year.
Merchant solutions revenue amounted to US$1.55 billion, up from US$1.23 billion.
Shopify’s net income excluding the impact of equity investments totalled US$344 million for the quarter, up from US$173 million in the same quarter last year.
Daniel Chan, a TD Cowen analyst, said the results show Shopify has a leadership position in the e-commerce world and “a continued ability to gain market share.”
In its outlook for its fourth quarter of 2024, the company said it expects revenue to grow at a mid-to-high-twenties percentage rate on a year-over-year basis.
“Q4 guidance suggests Shopify will finish the year strong, with better-than-expected revenue growth and operating margin,” Chan pointed out in a note to investors.
This report by The Canadian Press was first published Nov. 12, 2024.
TORONTO – RioCan Real Estate Investment Trust says it has cut almost 10 per cent of its staff as it deals with a slowdown in the condo market and overall pushes for greater efficiency.
The company says the cuts, which amount to around 60 employees based on its last annual filing, will mean about $9 million in restructuring charges and should translate to about $8 million in annualized cash savings.
The job cuts come as RioCan and others scale back condo development plans as the market softens, but chief executive Jonathan Gitlin says the reductions were from a companywide efficiency effort.
RioCan says it doesn’t plan to start any new construction of mixed-use properties this year and well into 2025 as it adjusts to the shifting market demand.
The company reported a net income of $96.9 million in the third quarter, up from a loss of $73.5 million last year, as it saw a $159 million boost from a favourable change in the fair value of investment properties.
RioCan reported what it says is a record-breaking 97.8 per cent occupancy rate in the quarter including retail committed occupancy of 98.6 per cent.
This report by The Canadian Press was first published Nov. 12, 2024.
