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Oil Giants Persist In Paradoxical Behavior, But They Can Afford It

We are possibly witnessing the largest stock market crisis in the last three decades. It is certainly the largest one since 2008. Up to now, coronavirus has infected more than 187,000 people, causing more than 7,000 deaths. The "pumping at will" beha

Benzinga · 03/18/2020 15:26

We are possibly witnessing the largest stock market crisis in the last three decades. It is certainly the largest one since 2008. Up to now, coronavirus has infected more than 187,000 people, causing more than 7,000 deaths. The "pumping at will" behavior exhibited during this oil war between Russia and Saudi Arabia is raging.

How are the oil giants facing the crisis and how will they adapt? As Charles Darwin once said, you either adapt or disappear, so something must be changed for these companies to survive. In situations when such shocking conditions are present both on the supply and demand side, leaving things as is can only lead to the inevitable demise of the entire business.

Saudi Aramco Declares Record High Production

Saudi Aramco Energy Ventures continues with its high output, stating to be prepared to produce 10 million barrels per day, which presents a record. Despite the record low demand caused by the COVID-19 pandemic, Saudi Arabia declared an oil war to its OPEC+ partner. Since love between these two partners disappeared in March when they failed to reach an agreement, both Saudi Arabia and Russia started pumping oil as we are not facing a menace that is threatening the entire mankind. Moreover, it is surely the deadliest one we've encountered during the previous three decades. Yet, it is announced that the production in April and most probably May will be around 12.3 million bpd (barrel per day), while currently the production level is 9.8 million bpd, therefore we are speaking of a 25% increase. Consequently, stock prices slumped below its IPO prices as Aramco is by far the world's most valuable company, exceeding even Apple Inc (NASDAQ: AAPL), and is currently at 29.10 riyals ($7.75), where the highest price was 38.70 riyals ($10.31).

US- A Different Approach

On Monday, another oil producer Pioneer Natural Resources (NYSE: PXD) slashed its 2020 spending down from $3 billion to $3.3 billion to a range of $1.6 billion to $1.8 billion. It is also reducing its rig count by half, from 22 to 11 rigs as it is set for a flat year-over-year production. EOG Resources (NYSE: EOG), another one of the US independent ones is also targeting the same.

Exxon Mobil – Dramatic Cost Cuts Ahead

Exxon Mobil (NYSE: XOM) will drastically decrease its spending both due to the coronavirus pandemic and the aggressive oil war between OPEC+ superpowers. Initially, Exxon planned to invest between $30bn – $35bn in oil research, however, this will be put on hold. Furthermore, this measure will affect both OPEX and CAPEX, said Darren Woods, CEO of Exxon Mobil. The focus will be to maintain normal business operations in these challenging times, in a situation that the world hasn't been in since WWII.

In that way, three key pillars will be in focus – the safety of the people, the safety of the environment and the safety of the company. The CEO also noted that this situation is not new for the company since the business traces its roots from the mid-19th century. The company is therefore prepared for the long-term low-price environment.

Outlook

As we dive into even greater uncertainty, there are very few signs of optimism. The Zacks Oil-Energy sector currently has a rank #202, placing it in the bottom twenty percent of all industries. The current price of a barrel of $30 is the lowest in the previous four years, however, oil companies have shown significant toughness during previous crises, therefore we can expect that stability will be maintained with a strong cash flow generating ability to counter low prices.

At the very least there is still a somewhat of a demand despite the mentioned shocks. Moreover, most oil companies are prepared to cope with the oil price of $20 per barrel and amortise the grim perspective that awaits us all during the following months.

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