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Observer business agenda Oil
Investors fear there'll be no bright post-Covid dawn for oil majors
The industry may have put the lows of summer behind it, but this week will show that previous highs are now unreachable
Jillian Ambrose
Sun 25 Oct 2020 00.05 BST
The oil market may have heaved itself out of the darkness of “Black April” but investors are far from convinced that major oil companies will walk away unscathed from the coronavirus pandemic.
Royal Dutch Shell and BP will both face investors this week with quarterly financial results that will deliver profits well below those achieved a year ago, against a backdrop of tumbling share prices and rising Covid infections across major economies.
On Tuesday, BP is expected to report an underlying loss of $120m for the last quarter, according to analysts’ estimates. This would be a major improvement on its underlying loss of $6.7bn in the second quarter, following heavy writedowns on the company’s exploration business, but would still be well below the $2.3bn third-quarter profit reported in 2019.
BP’s announcement will come days after its share price fell below 200p a share for the first time since 1994, and months after the company cut its dividend for the first time since the Deepwater Horizon oil spill and set out plans to cut 10,000 jobs.
In the same week, Shell is expected to reveal a modest underlying profit, of $146m, for the third quarter, according to analysts, after plunging to a loss of $18.4bn for the second quarter. This is still a fraction of the $4.76bn profit recorded in the same quarter last year, and follows the company’s decision to cut 9,000 jobs and reduce the dividend for the first time since the second world war.
This trend is expected to be followed across the world’s oil companies, tracking the fragile and uncertain recovery of global oil markets amid a second wave of coronavirus infections. The price of oil reached an average of $43 a barrel in the third quarter – stronger than the average of $30 a barrel in the second quarter, when US oil prices fell below zero for the first time in April – but still well below the $62 a barrel price that prevailed in the third quarter a year ago.
Denmark's Ørsted, with its doubled valuation, is a reminder of what oil firms could have done had they invested in renewables
Oil industry investors may have already weathered the darkest days of the pandemic, but in recent months it seems to have dawned on many that there is a very long road ahead – and that a full oil industry recovery may never happen.
Many experts believe that the heavy hit to demand for oil during the pandemic may mean it is years before market prices recover to $50 a barrel. BP’s own global energy forecasts suggest that oil demand may never recover from the impact of coronavirus on the global transport industry, heralding a sooner-than-expected existential decline for fossil fuels.
The company’s energy outlook report seemed to underline the importance of BP’s plans to reduce production of oil and gas by 40% over the next decade while investing billions in renewable energy to transform it from oil major to modern energy company. But in investors’ eyes the oil industry’s battered balance sheets don’t look in good shape for fuelling a green energy transition.
BP’s shares have languished at 25- year lows for the past month, taking its £41bn market cap to less than a third of what it was a decade ago, following its failed bid to move “beyond petroleum” in the early 2000s.
The company’s market value has been topped by offshore wind developer Ørsted, once known as Danish state oil company Dong Energy, which has a market valuation of £49.6bn on the Copenhagen exchange. Its valuation has doubled in the past two years after it switched from fossil fuel investments to renewable energy a decade ago.
Ørsted is a stark reminder of what might have been possible for other oil companies had they seized the opportunity to invest in the nascent renewables industry, and may prove a formidable rival for the favour of investors, too.