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Pandemic brings pain, opportunity for oil giants
THE coronavirus has exposed the fragility of some of the world's biggest oil and gas companies, but also given them the opportunity to make investors swallow some unpleasant remedies.
Since the pandemic started, BP Plc and Royal Dutch Shell Plc have made drastic changes to their businesses, from multibillion dollar writedowns to big cuts to dividends and jobs.
They explained these moves as responses to the dual threats of the lockdown-induced oil slump and the growing pressure to cut carbon emissions. Yet the decisions say as much about the companies' individual fragility as they do of the challenges faced by the broader industry.
The current crisis, according to some analysts and investors, has given BP and Shell the chance to clean house by reducing onerous shareholder payouts or adjusting unrealistic price assumptions.
"The BP announcement 'kitchen sinks' it, so that long-term investors can step in with much of the worst in the rear view mirror," said Thomas Hayes, managing member of investment management firm Great Hill Capital LLC.
BP announced on Monday the biggest writedown on the value of its business since the Deepwater Horizon disaster a decade ago. That came a week after the company said it would cut 10,000 jobs.
Chief executive officer Bernard Looney said the moves were necessary because oil and gas prices will be lower than expected in the coming decades as the coronavirus hurts long-term demand and accelerates the shift to cleaner energy.
His counterpart at Shell, Ben van Beurden, blamed the same factors for his difficult decision to cut the company's dividend for the first time since the Second World War. Several analysts and investors predicted BP will do the same before the current crisis is over.
"There has to be a chance that Mr Looney is softening up BP shareholders for a dividend cut," said Russ Mould, investment director at AJ Bell.
The coronavirus pandemic and the push to cut carbon emissions each have the potential to reshape the industry, but some problems predate those twin crises.
In Shell's case, investors were already questioning the affordability of a US$15 billion annual dividend for a company that also planned to make make massive investments in clean energy.
BP faces a similar challenge, plus a few other longstanding vulnerabilities. Its previous long-term expectations of US$75 a barrel for Brent crude and US$4 per million British thermal units for US natural gas were already too high compared to prices in the last few years, said Allen Good, an equity analyst at Morningstar. BLOOMBERG