AlwaysFree: Oil Majors’ Refining Margins Crushed In Third Quarter

The coronavirus pandemic put a heavy lid on oil prices earlier this year as it ravaged global energy demand. The prices have stabilized at around $40/barrel thanks to efforts in curbing supply by global producers. Refining and trading provided Big Oils with safety nets amid low and volatile prices in the previous oil crashes. However, it did not seem to be the case in the third quarter of 2020 as the pandemic prevented consumers from going out.

Patrick Pouyanne, the CEO of French energy giant Total, said refining margins were “absolutely terrible” in the third quarter. Earlier in October, the company reported a refining margin of negative $2.70/ton in Europe. Shell and ExxonMobil also flagged deteriorating margins from their refining operations. Smaller oil companies such as Repsol, Galp Energia, Saras, and MOL Hungarian Oil & Gas Plc also reported sharp falls in their refining margins.

Oil majors are often secretive about their trading businesses’ earnings. However, they hinted that their trading operations experienced an extraordinary quarter in April through June. Shell, Total, and Equinor were saved from posting losses thanks to their trading arms, which benefited from wild volatility and contango plays. However, the two things have eased, meaning that the oil trade is unlikely to save oil majors’ day this time. Shell warned that the performance of its trading business would be below average in the July-September period.

In the first half of the year, Shell, BP, Eni, and Equinor announced cuts in their dividend payouts. Only Total managed to keep its dividend untouched. In the US, Chevron and ExxonMobil have pledged to prioritize the dividend. However, Exxon has failed to generate enough cash to cover the payouts. The company’s dividend yield is currently more than 10%, indicating an imminent dividend cut.

Shell and Chevron are among the oil majors with significant exposures to LNG. Both companies are expected to experience a substantial impact on LNG margins in the third quarter because the majority of their term sales are based on prices that are linked to oil. The collapse in Brent in April now made long-term contracts cheaper than spot deals. Shell and Chevron are also dealing with technical problems at their Prelude and Gorgon LNG facilities in Australia.

In North America, the pandemic has forced struggling oil and gas producers to slash costs and ramped up pressure on them to absorb smaller rivals. Canadian oil and natural gas company Cenovus Energy announced it would acquire Husky Energy in a $2.9 billion deal. Previously, US shale producer Pioneer Natural Resources bought Parsley Energy for $4.5 billion. This followed ConocoPhillips’ $9.7-billion purchase of Concho Resources and Chevron’s $4.2-billion acquisition of Noble Energy.

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