In Q1 2020, every segment of the industry was impacted, including the refining sector which gave refuge to oil majors in previous downturns.
This article is a part of the Oil and Gas Quarterly Trends series.
The first quarter of 2020 was one of extraordinary events as the oil and gas industry faced a dramatic downturn in demand from the COVID-19 outbreak, the virtual shutdown in many sectors of the economy, and a collapse in local and global mobility. The average oil price in Q1 2020 was 20% lower than in Q4 2019.
During Q1 2020, oil prices were extremely volatile – the price at the end of the quarter was one-third of the price at the start. On the day before the WTI May futures contract expired, prices went significantly negative as traders realized how difficult it might be to deliver into those contracts with little or no storage capacity available.
Every segment of the industry was impacted, including the refining sector, which provided refuge to oil majors during previous downturns. As refining spreads fell by 27%, refineries were left idle by the operators. LNG prices, which were at unsustainable levels prior to the current crisis, declined further, and the spread between Henry Hub feedstock prices and the landed price of European and Asian LNG narrowed to essentially zero. Furthermore, deep upstream capital spending cuts pose an existential threat to oilfield services players.
Not surprisingly, company results reflected these unfavorable market dynamics. Combined net income was down 38% from Q4 2019 and down 148% from Q1 2019. Operating cash flows were also weak: 24% below Q4 2019 levels and 13% down from a year ago.
Return on capital or capital spending?
Financial matters took on increased urgency for the analyst community. This quarter, however, the lens moved from the ability of companies to return capital toward their resilience and capacity to survive in market conditions that none had ever contemplated.
Most analyst questions were, of course, tied to the current crisis. With deep spending cuts announced, analysts were concerned about the timing of recovery in capital spending levels to pre-crisis levels. They also wanted to understand if companies foresee a structural shift in long-term oil and gas demand patterns and how that might influence capital allocation.
Companies were asked several probing questions on their dividend strategy and how they would prioritize capital spending and dividend growth, with some specifically asked if it was financially prudent to cut capital spending while sustaining dividends. They were also asked about their ability to sustain dividends over the long term if oil prices continue to remain low. For some companies, analysts questioned whether there would ever be a return to growing dividends.