Welcome to Power Line, a weekly energy newsletter brought to you by Business Insider.
Here’s what you need to know:
Did you wake up today and think, “Wow, I just really want to learn about debt markets and dividends?”
Well, boy, do I have good news for you.
In all seriousness, the state of energy bonds and dividends can tell you a lot about the health of the industry. (Spoiler: It’s seen better days. Then again we all have.)
But first, oil.
Quick refresher: The pandemic has stunted demand for fuels like gasoline because people are staying at home. That’s sent demand for oil into a downward tailspin, and the price has plunged.
- Oil-producing nations like Saudi Arabia and Russia agreed to record supply cuts in an emergency effort to stabilize the market.
- All in all, those cuts could amount to as much as 15 to 20 million barrels of oil per day in May and June or about 15-20% of global supply.
- But the price of oil futures didn’t rebound on the news. It’s actually fallen. This morning, Brent crude was selling for $28 — down about 65% since the start of the year.
Million-dollar question: Why isn’t the market responding?
- The demand drop is too big to counter, even with steep cuts to supply.
- Plus, those cuts may be much smaller in reality than on paper.
- Oh, and we’re running out of places to store oil. Morgan Stanley says we could reach “tank tops” in as little as two months, and that puts a ton of downward pressure on prices.
This is fantastic news if you have empty tanks lying around — or if long drives are your antidote to the loneliness and anxiety wrought by the novel coronavirus, as gasoline is very cheap.
But the oil and gas industry is hurting.
I told you dividend-talk was coming. Because dividends may be going — and among the world’s largest oil companies like BP and Eni no less.
These companies’ dividend payouts have long been a major draw for investors.
But now, they’re at risk of being cut, according to Lysle Brinker, an executive director of equity research and analysis at the research firm IHS Markit.
- The last time the price of oil crashed, around 2016, all but one major kept their dividend program intact.
- But this downturn is different, he says, because oil majors are carrying more debt.
- On average, their ratio of debt to capitalization is about 5 percentage points higher than at the cusp of the last downturn, at about 30%, he said. And they’re expected to climb.
- Dividends are going to make up as much as 60% of these companies’ cash flows, he said.
In other words: Oil majors don’t have a lot of money to spend right now because oil is cheap, and they’re spending what money they do have on dividends. Brinker says that’s unsustainable if oil prices remain low.
(Several smaller oil and gas companies like Apache have already announced dividend cuts. You can follow the latest updates here.)
Cheap oil also raises the specter of bankruptcies. There’s been one high-profile one so far — the exploration and production company Whiting Petroleum — and there are more to come.
Here’s why: The ratings agency Fitch released a list of “top bonds of concern,” which includes high-yield bonds most at risk of default.
Have you been laid off in the oil and gas industry? We want to hear from you. Reach out at [email protected].
Big updates for big oil
1. Shell: The energy giant unveiled plans to become a net-zero emissions company by 2050, following in the steps of other majors like BP and Repsol.
- “At a time when many U.S. oil companies are using the COVID-19 crisis to push for environmental rollbacks, it is encouraging to see the UK oil giant Shell significantly raise its ambitions to align its business with the low-carbon transition,” Andrew Logan, senior director of oil and gas at Ceres, told MarketWatch.
- Another perspective: “The world needs Big Oil to lead the energy transition from fossil fuels to renewables,” Dutch investor group Follow This said in a statement. “While Shell repeatedly claims its ambition is to support Paris, management consistently refuses to adopt the concrete emissions targets needed to reach the Paris goal of well-below 2°C.”
2. ConocoPhillips: The Houston-based oil company is slashing oil production by about 225,000 gross barrels per day in the US and Canada.
3. BP: Monday is the anniversary of the Deepwater Horizon oil spill, considered the worst oil spill in history.
- The disaster killed 11 people and leaked more than 3 million barrels of oil into the Gulf.
Did you know: Bill Gates is very, very rich.
- He’s worth more than $100 billion, putting him behind only Amazon’s Jeff Bezos.
- And as it turns out, he’s putting (what is likely a very small) part of that fortune behind clean energy startups.
We counted 24 of them using PitchBook, and they’re working on all kinds of breakthrough technologies — from measuring methane emissions using backpack-sized satellites to developing hydropower turbines that are less likely to harm fish.
4 top stories we didn’t cover
- The clean-energy industry could lose 500,000 jobs — or 15% of its workforce — in the wake of the coronavirus pandemic, according to a new analysis by a handful of research groups.
- More than 100,000 clean-energy workers lost their jobs in March, the analysis found.
- The EPA relaxed regulations “on the release of mercury and other toxic metals from oil and coal-fired power plants, another step toward rolling back health protections in the middle of a pandemic,” the New York Times reports.
- BlackRock raised $5.1 billion for “a new fund focused on power plants, pipelines, and other energy infrastructure assets and businesses,” the Wall Street Journal reports.
- It’s the largest “alternative investment fundraise in BlackRock history,” the company said in a statement.
- The investments include renewables, natural, gas, and energy storage, but not coal.
- Good days for green hydrogen: “The pipeline of electrolyzer projects destined to produce hydrogen from renewable energy has nearly tripled in just five months,” Greentech Media reports.
I hope you are well and finding some joy in isolation. I’m currently watching a red-bellied woodpecker hammering away at the wood paneling on the house I’m staying in. Great.
P.S. If you’ve got feedback on this newsletter, I’d love to hear it. Email me at [email protected].