European majors struggling to find finance

By Annemarie Botzki, Natural Gas Daily

Europe’s oil and gas majors are struggling to fund new projects despite their slowly improving financial results.

Although far from healthy, the quarterly results of most of Europe’s largest oil and gas companies, released this week, generally exceeded analyst expectations.

"The results have been generally well received by the markets. One can’t ignore the strong oil price rally from February lows as a catalyst for some of the outperformance in the sector – especially in E&P," Augustin Eden, research analyst at Accendo Markets, told Interfax Natural Gas Daily.

"Bars were set low via cautious guidance [following] the last lot of results, and the subsequent recovery in crude prices has certainly helped the companies concerned clear those bars," he added.

But the fluctuation of and uncertainty around the oil price has left banks fearful of backing new deals, which has seen traditional means of financing new projects, such as reserve-based loans, come under pressure.

"It is not the low oil price per se, but the volatility that is the deal-killer at the moment – portfolios are distressed and banks are not lending any new money to energy companies, with particular expenditure on upstream programmes cut back," Julian Nichol, energy lawyer and managing partner at the London office of law firm Bracewell & Giuliani, said this week.

Efficiency gains

Efforts to boost efficiency and reduce operational costs have improved company results and pushed down break-even prices for oil.

"We have a firm plan to improve efficiency and make faster and deeper cost reductions," Eldar Sætre, chief executive at Statoil, said on Wednesday. "We are radically improving our project break-evens and we are on track to reset costs and thereby impact the parameters that we can control."

But Statoil’s adjusted earnings after tax were $122 million in Q1 2016, down from $902 million in the same period last year – the result of lower oil prices. Despite this, the company increased production from the Norwegian Continental Shelf by 2% in Q1 2016 compared with a year earlier. Norway’s Finance Minister Siv Jensen has previously told Interfax Natural Gas Daily that the country is feeling the impact of low oil prices and is preparing for hydrocarbons to play a lesser role in the country’s economy.

Speaking at the release of the company’s Q1 results on Wednesday, Total Chief Executive Patrick Pouyanné said Total’s upstream portfolio benefited from the lowest technical costs among the majors. Gas production increased by 4% in the first quarter, driven by the ramp-up of nine projects brought on stream in 2015 and the startup of the Laggan-Tormore and Vega Pleyade fields this quarter.

Italy’s Eni surprised analysts on Friday when it posted worse-than-expected results. The company recorded an adjusted net loss of €479 million ($545 million) compared with a profit of €454 million for the first quarter of last year.

UK major BP reported a $532 million profit for Q1 2016 compared with $2.6 billion for Q1 2015, beating analysts’ predictions of a $245 million loss.

The better-than-expected results have been seen by some as a sign that global oil markets are rebalancing. BP’s Chief Executive Bob Dudley said market fundamentals suggest a combination of robust demand and weak supply growth will move global oil markets closer to balance by the end of the year.

However, spending cuts are set to continue as the companies execute their cost reduction programmes.

Before announcing its results on 4 May, Shell said it will close BG Group’s UK headquarters and cut more than 10,000 jobs worldwide as part of plans to reduce costs. Staff at the office in Reading will be offered voluntary redundancy.

Martin Stewart-Smith, an LNG-focused lawyer at Bracewell, pointed to other areas where he said firms were feeling the pinch.

The general trend towards shorter contracts and hub pricing has also left producers exposed to higher risk and made project financing challenging. The uncertainty around future hub prices has prompted a move towards smaller projects and alternative means of financing. According to Bracewell, service contract companies have started financing projects to secure their future business.

"Bigger companies that are high cost and too big to turn around to the new reality will fall behind the companies that recognise the new market and are able to repurpose themselves," Stewart-Smith said.

Bracewell said it expects more consolidation in the industry, but that deals would mainly be done on an asset-to-asset basis rather than buying companies whole – as with the Shell/BG merger.

Please contact Matt.Shelton@interfax.co.uk for a free trial to Natural Gas Daily or Global Gas Analytics