What to Expect from Q3 Oil Major Earnings

Norwegian energy major Equinor ASA (EQNR) released its Q3 earnings on the 24th of October and we will discuss the implications for the major companies that are releasing this week, including Shell, Exxon, and Chevron.

The headline for Equinor’s Q3 earnings was an adjusted income of $2.5bn and $1.08bn after-tax but the company still booked a $1.1bn loss following $2.79bn in net impairments. These impairment charges were due to “more cautious price assumptions”, which were related to unconventional assets in the United States (i.e. shale).

Another drag on Equinor’s earnings was the decision to defer gas production to periods with higher expected prices.


The first implication for the next oil majors’ releases is the confirmed slowdown in the shale patch. This was also seen in earlier Q3 releases by service companies, Schlumberger and Halliburton, with the former announcing a record quarterly loss of $11.9bn. The headlines are confirming that a slowdown in U.S. production is now filtering through to the bottom line and this may be the start of the trend, where financial pressure on the independent explorers drags production lower in the next 2-3 quarters. This would have obvious implications for oil inventories and crude oil prices.

Total revenues for the third quarter were $15.6bn, which were down from $17bn in the previous quarter but lower than the $19.1bn from Q3 2018. Oil prices were lower but so was Equinor’s production, with total liquids at 8% lower- largely impacted by the deferred gas production.

Like the overall industry, capital and cost discipline are still the focus, so costs were contained and boosted by lower seismic costs cost due to new technology. Exploration expenses were $55 million due to higher drilling and field development costs brought about by the buoyant market.
In Shell’s second quarter earnings, they stated that CAPEX would be $25bn-30bn through 2020 but even in a high oil price environment, the ceiling would be the $30bn level. This will hold for the other major companies with CAPEX for next year coming in at the higher end of 2019 figures. Despite the caution, Equinor still brought five new fields online in 2019 with significant production potential.

Summary

Equinor’s earnings have given investors a heads up for the rest of the major energy producers that are due to deliver their Q3 figures this week. Headline revenues are expected to be lower due to the lower price of oil and in Equinor’s case, gas prices at the lower end of a 10-year range, have seen them defer gas production until later quarters. This would make sense if we get a colder than expected winter. Expect to see strong revenues again from the major explorers but beware the potential sting of shale impairments. This trend could continue into early-2020 if oil and gas prices continue to struggle at the bottom end of their ranges.