Oil sector faces collapse

Should embattled US oil producers be bailed out? And what will happen to Shell and BP’s dividends this year? Matthew Partridge reports.

It has “barely been a week” since President Donald Trump sealed what seemed a “rare diplomatic victory” by getting major oil producers to cut as much as 15 million barrels a day of global output, says Spencer Jakab in The Wall Street Journal. But the effort has failed to boost long-term prices, while the spot price of US crude has turned negative on fears that storage capacity will soon be exhausted. As the shares of oil producers plummet there are now concerns that this “systemic failure” in the oil market will force American producers to turn off the taps for good.

Oil-field services behemoth Halliburton and producers Marathon Oil and Occidental Petroleum have already “lost more than two-thirds of their value”, says Dino Grandoni in The Washington Post. Many more “smaller, debt-saddled” shale producers are even more vulnerable to going under. As a result, President Trump is now considering “an array of policy tools” to help save energy jobs and companies, including buying surplus oil to fill the nation’s Strategic Petroleum Reserve and even turning away tankers carrying Saudi oil from America’s ports. However, the idea of a bailout for oil companies remains controversial.

A broken business model

A bailout might be tempting, given that energy is an “important driver of investment” and Trump will be wary of the popular backlash that could come from a surge in oil sector layoffs, says Megan Greene in the Financial Times. However, the business model of many oil companies, which involved borrowing large sums of money to finance marginally profitable projects, was “broken before oil prices fell”; any bailout would “throw good money after bad”. Worse, it might delay the “productivity gains and consolidation” needed to make the industry consistently profitable by reducing both financing and production costs.

While many American producers are on the ropes, the key issue on this side of the Atlantic is whether the dividends of BP and Shell, whose projected payouts comprise a third of expected UK dividends this year, are safe. Earlier this week the story was that even if oil remains around $30 per barrel, the payouts were set to continue throughout next year due to declining production costs and spending cuts. With Brent crude falling below $20 on Wednesday, however, the pressure is mounting. 

Oil firms with “break-even prices above $40 a barrel, which is pretty much all of them, will be burning through cash extremely quickly, unless they take further measures to cut costs”, Michael Hewson of CMC Markets UK told Citywire. If the slump drags on they may have to review their long-term priorities. “There will come a point,” Hargreaves Lansdown’s Nicholas Hyett told City AM, “where they will have to choose between their expensive low-emissions energy plans and continuing to pay their dividends”.

Recommended

Is the oil market heading for a supply glut?
Oil

Is the oil market heading for a supply glut?

Many people assume that the high oil price is here to stay – and could well go higher. But we’ve been here before, says Max King. History suggests tha…
16 May 2022
A family-run investment trust to buy and lock away
Investment trusts

A family-run investment trust to buy and lock away

Menhaden Resource Efficiency made a slow start, but progress is encouraging. Buy before the discount closes, says Max King.
16 May 2022
Get set for another debt binge as real interest rates fall
UK Economy

Get set for another debt binge as real interest rates fall

Despite the fuss about rising interest rates, they’re falling in real terms. That will blow up a wild bubble, says Matthew Lynn.
15 May 2022
Hong Kong’s brain drain
Chinese economy

Hong Kong’s brain drain

A change in the political atmosphere and a harsh zero-Covid regime has seen thousands flee the global financial hub. Does it have a future – or will S…
14 May 2022

Most Popular

High inflation will fade – here’s why
Inflation

High inflation will fade – here’s why

Many people expect high inflation to persist for a long time. But that might not be true, says Max King. Inflation may fall faster than expected – and…
13 May 2022
Cryptocurrencies are crashing – so how low will bitcoin go?
Bitcoin & crypto

Cryptocurrencies are crashing – so how low will bitcoin go?

The entire cryptocurrency sector is crashing, with bitcoin now well below $30,000. This is big, says Dominic Frisby. So just how low could bitcoin go?
12 May 2022
What the Ukraine crisis might mean for ESG investing
Advertisement Feature

What the Ukraine crisis might mean for ESG investing

The Ukraine crisis has brought many of the issues around ESG investing into sharper focus. Where does the sector go from here?
3 May 2022