Friday, April 15, 2016

Corporate winners and losers amid the oil price crash



Oil price crashes have profound consequences. The fall in crude after the 1997 Asian financial crisis ushered in today’s oil and gas supermajors after a flurry of megamergers that included BP’s tie-up with Amoco, Exxon with Mobil and Texaco with Chevron.
The latest collapse in oil is having an enormous impact — even though the benchmark Brent price has rebounded in 2016, it is still about 60 per cent down since mid-2014.

But the consequences of this oil decline have not been the ones that history might suggest would occur, either within or outside the oil industry.
Thousands of jobs have been axed as rigs have been idled and investment slashed across the sector.
However, with the exception of Royal Dutch Shell’s acquisition of smaller rival BG Group, there has so far been nothing like the wave of large deals that followed the late 1990s oil downturn.
That is because this downturn was preceded by a period of virtual “free money” following the 2008 financial crisis, says Tony Hayward, chairman of Glencore and former chief executive of BP.
“Much of the industry was massively overleveraged in a way it wasn’t in 1998 and 1999,” he adds, and that is leading to bankruptcies in the US shale industry, and preventing consolidation.

But what of the rest of the corporate world?
Conventional wisdom says cheap fuel is good news for airlines, makers of gas-guzzling cars, and other companies able to produce or ship goods less expensively for shoppers with wallets fattened by lower pump prices.
Conversely, a low oil price is supposed to be bad news for power generators using renewable energy and electric carmakers.
But the reality has been more complicated in an oil price rout that has been deeper and longer than many experts predicted, and is happening in a world that has changed considerably since previous crashes.
One of the biggest differences between the latest oil price downturn and past declines is the way consumers have responded to the extra cash in their pockets coming from cheaper fuel.
Moody’s says lower oil prices will not translate into the expected strong spending on some consumer goods because many people are focused on saving.

Expectations have failed to match reality in many parts of the power sector, too, thanks to the pronounced changes the industry has experienced since previous oil crashes.
For one thing, the oil-fired power plants that generated as much as 18 per cent of global electricity in 1980 now produce about 5 per cent, so lower crude prices do not threaten wind farms and solar parks as much as might be imagined.
The number of countries with renewable energy targets has soared from just 73 in 2010 to 164 in 2015, data from the International Renewable Energy Agency show.
That is one reason the oil rout has failed to dent healthy annual growth in renewable power-generating capacity.
Sales of fuel-hungry sport utility vehicles have jumped, but government incentives have to some degree protected the much smaller electric car industry.
Monthly sales of electric cars and other vehicles in the US have fallen since the oil price started to decline in mid-2014, but they have risen in Europe, according to figures from Jato Dynamics, an automotive research firm.

Packaged goods companies

For consumers, lower oil prices mean less expensive petrol, leaving more money in their pockets to spend on other items, writes Scheherazade Daneshkhu.
This increase in disposable income is, in theory, good news for consumer goods companies — selling food, soap powder and toiletries — which also gain from lower fuel costs. But the reality is more nuanced.
Consumers in oil-importing countries, such as India, benefit. But Sarah Solomon of Euromonitor International says those living in oil-exporting countries like Russia “are seeing their economies squeezed. Added to this, many emerging markets are experiencing currency weaknesses and this increases import costs, pushing up inflation, which can more than offset lower energy prices.”
Unilever said in January that lower oil prices were helping its laundry business through reduced input costs, but hindering the sales growth of bulk tea, much of which is sold to Middle Eastern countries.
Finally, as Ms Solomon points out, consumers do not necessarily spend the savings they make on lower energy bills. Globally, savings as a percentage of disposable income increased slightly in 2015.
Moody’s said last month it now expects the effect of low oil prices on US packaged food companies, such as Kraft Heinz, to be “moderately positive” instead of “strongly positive”.
Brian Weddington of Moody’s says: “Consumers have remained cautious spenders, which has resulted in heavy price competition . . . Thus, we expect that companies will reinvest much of the cost savings from cheaper fuel in promotions and marketing to at least maintain sales volumes.”

Airlines

Airline executives finally have a smile on their faces. After seeing fuel become their single biggest cost in the era of high oil prices, carriers are now celebrating the plunge, writes Tanya Powley.
But while airlines are natural winners, how quickly they can reap the full benefits from cheap oil has varied significantly across the industry.
This largely comes down to an airline’s hedging contracts. Fuel typically accounted for about one-third of carriers’ operating costs before the oil rout, and many airlines opt for the predictability that hedging oil purchases several months forward allows.
US carriers, which are generally less reliant on fuel hedging, have enjoyed the biggest boost so far from cheap oil.
Executives at American Airlines will be lauding their decision to abandon hedging in 2014, which has enabled it to enjoy lower fuel costs faster than many rivals. This contributed to record net profits for 2015.
In January, Delta Air Lines said its fuel costs for last year were down 44 per cent compared with 2014.
European airlines have had to be more patient. Both flag carriers and budget airlines on the continent tend to hedge 12 to 18 months out, so some have had to wait until this year to secure big benefits from cheap oil.
“Most large European airlines are starting to see major benefits now,” says Oliver Sleath, analyst at Barclays. “They’re moving from paying an average effective rate of $90 to $100 a barrel in 2015 down to $60 to $70 a barrel in 2016.”

Manufacturers

The axing of investment projects by oil and gas producers has taken its toll on manufacturers that count energy companies among their most important customers, writes Michael Pooler.
The energy sector accounted for one-third of corporate capital expenditure globally in 2014, but investment cuts will shrink that share to a quarter by 2017, according to Standard & Poor’s.
In the US, the fortunes of the energy and manufacturing industries are particularly intertwined. This is highlighted by how the US manufacturing purchasing managers’ index, a measure of the sector’s health, started falling when the oil price began declining in mid-2014.
“Oil has generally been a leading indicator for industrial confidence in the US,” says Matthew Spurr, analyst at RBC Capital Markets. “Once manufacturers realised we were in the lower-for-longer scenario, the PMIs started to reflect that.”
Those affected include Caterpillar, the world’s largest maker of construction machinery. Cheap commodities contributed to a 15 per cent fall in revenue in the company’s 2015 results, with the effect of lower crude prices hitting its unit that supports drilling and well servicing.
The oil price collapse is also reverberating in South Korea, the world’s biggest shipbuilding nation. Its three giants of the industry — Hyundai Heavy IndustriesSamsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering — have recorded much reduced orders for energy platforms and drill vessels.
Elsewhere, an expected lift for chemicals companies that make their products from oil derivatives has largely not materialised.
This is partly due to reduced demand for chemicals in the energy industry, says Jeremy Redenius, analyst at Bernstein.

Carmakers

Falling oil prices have led to a boom in sales of large, fuel-hungry cars, writes Peter Campbell.
In the US, Europe and China, sales of sport utility vehicles and so-called “crossover” cars have outpaced traditional saloons.
Large vehicles have higher margins for carmakers, and are also attractive for consumers because they offer better visibility and more storage space.
SUVs became the best-selling type of car across Europe for the first time last year, according to Jato Dynamics, an automotive research firm, after sales rose 24 per cent to 3.2m units.
SUVs accounted for 22.5 per cent of all cars sold in Europe, with demand rising in the 29 countries analysed by Jato. More than 1m crossover cars were sold last year.
“Similar to the shift towards SUVs in the US car market, Europeans are clearly favouring these vehicles,” says Felipe Munoz, an analyst at Jato.
“Both economic and social factors such as the lower fuel prices and the growing appeal of SUVs’ benefits had a big influence on this sales boom.”
Between 2010 and 2014, unit sales of SUVs rose from 12 per cent of the Chinese market to 23 per cent.
In the UK, several big manufacturers have seen demand for large cars rise in recent years.
In February Jaguar Land Rover said the Range Rover Evoque, the luxury compact SUV built in Halewood, Mersyside, was the fastest-selling vehicle ever.
Last month Nissan expanded production of its Qashqai crossover at the company’s Sunderland plant, after saying that annual output of 300,000 cars was not enough to meet rising demand.

Ethanol producers

Tumbling oil prices have hurt the biofuels industry around the world, writes Pilita Clark.
The sector’s fortunes depend heavily on government support for renewable fuels in most countries. But where crude prices go, biofuels generally follow, so the oil rout has had a negative impact on the industry.
“It’s been significant,” says Claire Curry, analyst at the Bloomberg New Energy Finance, a research group.
In the US, the biggest biofuels producer, ethanol prices have fallen from nearly $3.50 a gallon since mid-2014, to less than $2 this year. Ethanol is usually blended with petrol for use in cars and other vehicles.
The shares in some large US biofuels companies have followed a similar path to ethanol prices. For example, the stock of Green Plains of the US has fallen more than 40 per cent in the past year.
In Europe, Germany’s CropEnergies, one of the sector’s larger producers, suspended output at its Ensus refinery in the UK just over a year ago.
That contributed to an 11 per cent decline in CropEnergies’ revenues during the first three-quarters of its 2015-16 financial year, but has helped ease concerns about too much capacity in the industry.
The sector’s woes have also paved the way for some consolidation.
For example, last year Pacific Ethanol of the US bought Aventine Renewable Energy, an Illinois-based ethanol producer.
Global investment in biofuels had already dried up before oil prices began to fall, plunging from more than $25bn in 2007 to well below $5bn in 2014, as governments curtailed their support.


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