Oil firms groan as price volatility hits balance sheets
While oil and gas production could be assessed to be booming around the globe, the same thing could not be said about corporate profits.
As the prices of crude oil remain flat, the world’s oil majors and Nigerian indigenous companies are getting less in returns for the vast sums they invested on projects.
For instance, Royal Dutch Shell, ExxonMobil and Chevron announced drops in their recent respective quarterly profits.
Also, Nigeria’s indigenous company – Seplat Plc released its 2015 second quarter results recently, showing a pre-tax profit of N792 million representing an 83 per cent drop from a quarter ago.
An indigenous company, Afren recorded a loss of $1,651 billion in its recent report “mainly due to a reduction in revenue given the fall in oil prices.”
Prices have fallen almost 60 per cent since this time last year, and more than 34 percent in just the past three months.
Together, Exxon Mobil and Chevron has shaved more than $95 billion from their combined market value since last year.
The fall in prices saw all the companies report lower quarterly earnings in first quarter and second quarter than their respective average quarterly earnings from 2014.
Exxon Mobil, the world’s largest publicly traded oil company, reported a 52 per cent slide in second-quarter profit as, again, tumbling crude prices weighed on its results.
A barrel of U.S. crude fell below $40 per barrel for the first time since the end of the global economic crisis.
Monday’s fall, to $39.86, was just the latest indicator of a vast shift in the energy landscape.
Oil prices have been falling solidly for eight consecutive weeks. That’s the longest streak since 1986.
Due to the price decline, Royal Dutch Shell said it would eliminate 6,500 jobs worldwide as the company tries to reduce costs because of the lower oil prices.
Dwelling on the impact of the crude oil prices on companies, Delloitte said that the most obvious impact of the oil price collapse on company accounts has remained the increased risk of impairment of assets.
According to the company, lower oil price forecasts mean that producers should expect lower future profits from an asset. “Subsequently, this reduces the present value of the asset, and if the value currently carried on balance sheets cannot be recovered in full, this results in write-off. There may also be a knock-on effect on related deferred tax and holding company investment balances.
“Rapidly changing oil prices make it difficult to judge the present value of assets for investment decisions on capital allocation, an acquisition or for accounting impairment purposes.
“Companies often apply forward curves in their valuation models. A recent Financial Times article demonstrates just how quickly forward price curves have changed, underlining the difficulty in judging the correct present value of an asset”.
It said that companies may also find renegotiating debt challenging. “At times of high oil prices, refinancing existing debt either through bank borrowings or issuing new bonds tends to be relatively straightforward.
“ However, lower asset values and increased default risks mean that borrowers will face increasing challenges, including the need to pay higher interest rates or enhance security packages, if they are able to borrow in the first place.
It added that more companies may also return to hedge accounting, which was increasingly used in the wake of the financial crisis.
With prices consistently above $100/bbl, most exploration and production companies were able to make profits without needing to hedge.
“However, many companies, especially large players, continued to pay for price hedging instruments as ‘insurance’ against a price fall. Lower prices may mean more producing companies, including smaller ones, could resort to ‘locking down’ their output with hedging instruments.”