Oil prices collapsed back in April.
The world in lockdown meant less global trade, less driving, less travelling. In other words, oil demand collapsed.
To counter the effects, oil producers agreed to cut 9.7 million barrels per day, or 10% of the global oil supply.
Still, Brent crude is hovering above US$40 a barrel, much lower from the US$70 a barrel at the beginning of the year.
Low oil prices hitting Aussie energy companies
Today Oil Search Ltd [ASX:OSH] released their quarterly results. While production was down by 1%, total revenue for the second quarter 2020 plunged by 26% compared to the previous quarter. The company reported a revenue of US$266.2 million, down from U$359.4 million in the previous quarter.
The main culprit for the collapse in revenue is the drop in oil and gas prices.
Average realised oil and condensate prices fell from US$49.51 per barrel in March 2020 down to US$23.05 in June. Average realised LNG and gas prices went from US$9.08 per million British thermal unit (mmBtu) to US$7.34 per mmBtu during the same period.
The bleak price outlook for oil and gas has already caused Oil Search to announce last week a non-cash write-down of between US$360 million and US$400 million before tax (AU$517–575 million) this year. You can read more on this here.
And, speaking of write-downs…
In an announcement today ASX energy producer Santos Ltd [ASX:STO] said they will be writing down the value of their assets between US$700 million and US$800 million before tax…also because of low oil prices.
The biggest hit is on Santos’ Gladstone LNG, with a US$640–700 million hit but also exploration assets mainly in the Cooper and Amadeus Basins.
The impairment is expected to increase Santos’ debt by 1.5%.
Santos Managing Director Kevin Gallagher said Santos ‘announced in March financial measures including reductions in capital and operating expenditure, and a target 2020 free cash flow breakeven oil price of US$25 per barrel.’
‘Our disciplined operating model combined with the proactive measures taken to reduce expenditure saw Santos generate more than US$430 million in free cash flow in the first half of 2020 despite significantly lower oil prices.’
While they didn’t deliver great news, both companies are clocking in gains today
At time of writing, the OSH share price pushed 2.5% higher while STO is up by 2%.
Still, with low demand and more perspectives of lockdowns, we think there are better investments out there.
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