5 energy giants suffer first-quarter wallop
Write-downs abound amid plunging value of oil operations during pandemic’s shutdown
Five of the largest energy companies posted billions of dollars in losses as the collapse of oil prices reduced the value of idled equipment by $30 billion — and dozens more companies are expected to do the same over the next two weeks.
Houston pipeline operator Kinder Morgan and oilfield service giants Baker Hughes and TechnipFMC on paper reduced the value of assets by a total of $20 billion as they reported combined quarterly losses of $13.6 billion.
Two days earlier, Houston oilfield services company Halliburton reduced the value of its assets by $1.1 billion, pushing the company to a $1 billion loss for the first quarter. Its rival and world’s largest oil-field services company, Schlumberger, on Friday reduced the value of equipment by $8.5 billion and then reported a threemonth loss of $7.4 billion.
Pearce Hammond, an analyst with the Houston energy investment bank Simmons Energy, said Wall Street focuses more on a company’s free cash flow and operating income than so-called write-downs. Similar to how a new car depreciates as you drive it off the lot, if it’s damaged in an accident, the value drops further, Hammond said. The same happens to oil field equipment, and in this case, the oil price crash slashed the value of the equipment and, accordingly, the company, he said.
The first-quarter earnings for the five companies took hits when West Texas Intermediate, the U.S. benchmark, fell from around $60 in January to about $20 at the end of the quarter. The decline was enough to force companies to write down the idled equipment.
“You’re going to see more of those write-offs as earnings season continues,” Hammond said.
With oil prices at record lows, caused by global glut that ballooned amid the collapse of worldwide demand during the coronavirus pandemic, companies are reducing drilling and completion activity. But those cuts play out in different ways across the energy industry’s sectors.
Pipeline operators, Hammond
said, will not feel as much pain as oil companies or as service companies with drilling rig operators, hydraulic fracturing crew fleets and equipment manufacturers.
“The closer to well head where you have companies shutting production — you’re feeling it,” Hammond said. “If you’re a service company, you’re feeling it. If you’re a midstream company, you’re not going to feel it as much.”
Kinder Morgan, a pipeline operator, lost $306 million during the first three months of 2020, a nearly 180-degree turn from the $567 million profit it had during the same quarter a year earlier. It had revenue of $3.1 billion, 9 percent less than the $3.4 billion recorded a year earlier.
The company marked down the value of equipment from its carbon dioxide business and its oil production operations in the Permian Basin of West Texas by $950 million.
Had it not been for the writedowns, the company would have realized a profit of more than $500 million, company figures show.
“Sharp declines in both commodity prices and refined product demand in the wake of the COVID-19 pandemic clearly affected our business and will continue to do so in the near term,” Kinder Morgan President Kim Dang said.
Behind the scenes, Kinder Morgan increased its dividend to stockholders at a time when most companies are cutting theirs.
Shareholders will get 5 cents more per year as the dividend rises to 26.25 cents from 25 cents per share, at a cost of $598 million per quarter.
The company will pay for the boost through free cash flow. Even after paying the first-quarter dividend, Kinder Morgan still had $664 million of cash.
“We believe we have struck the proper balance between maintaining balance sheet strength and returning value to our shareholders,” Kinder Morgan co-founder and Chairman Rich Kinder said.
Houston and Paris-based oilfield service company TechnipFMC posted a $3.3 billion loss one year after it reported a $20.9 million profit. The company’s first quarter revenue of $3.1 billion was up almost 7 percent compared with $2.9 billion in the first quarter of 2019.
The company says it is tightening its belt and reducing its dividend.
“Over the last two months, much about the world has changed, and we are taking swift and decisive actions in response to the market environment,” TechnipFMC CEO Doug Pferdehirt said. “These actions will generate more than $350 million in annualized cost savings.”
Created by the January 2017 merger of Paris-based Technip and Houston-based FMC Technologies, the company said in August it would return to being two independent and publicly traded companies. The oil market’s turmoil quashed those plans in March.
Houston-based Baker Hughes on Wednesday became the third oil-field service company to post a massive loss in the first quarter after writing down the value of assets as oil markets collapse.
The company cut the value of assets by more than $16 billion, resulting in a $10.2 billion first quarter loss compared with a $20.9 million profit a year earlier. Revenue, meanwhile, remained nearly steady at $5.4 billion during the first three months of the year, compared with $5.6 billion during the same period a year earlier.
The loss is equivalent to $15.69 per share compared with a 5 centper-share profit in 2019’s first quarter.
Baker Hughes’ oil-field services and oil-field equipment segments slashed the value of assets by $14.8 billion in the first quarter. The remaining write-downs came in the company’s other divisions.
“During the first quarter, the macro environment changed rapidly,” Baker Hughes CEO Lorenzo Simonelli said. “The sudden demand shock from COVID-19 combined with rising global oil supply drove a 67 percent decline in oil prices during the first quarter. Looking forward, the outlook for oil and gas demand and supply appears equally uncertain, and it will largely be driven by the pace of economic recovery from the COVID-19 pandemic and the supply response that ultimately materializes.”
Baker Hughes said it has cut its capital spending budget by 20 percent, readjusted business units, deployed cost-cutting technology and announced a small number of layoffs.