While many of us are making the most of cheap petrol prices with long, hot summer road-trips, investors in oil and gas companies like Santos Ltd (ASX: STO) have been struggling to understand why oil prices have not yet bounced back.
To give you the scoop, here are three things that only oil and gas experts know about the current situation:
- Why OPEC won't cut production
The oil price slump has triggered a battle for market share between oil producing nations. Countries aren't reducing production, which would drive up the price of oil, because they fear that the decrease will quickly be replaced by increases in production from other countries, handing them market share.
This is critical for countries that rely heavily on oil and gas to fund national budgets. According to OPEC, about 40% of GDP for the United Arab Emirates (UAE) is directly related to oil and gas.
In Australia estimates by the oil and gas industry in 2012 put the country's oil and gas industry growing from 2% of Gross Domestic Product (GDP) to as much as 3.5% by 2020 as new projects like Woodside Petroleum Limited's (ASX: WPL) Pluto LNG and Santos Ltd's (ASX: STO) GLNG hit maximum capacity.
- Why Woodside Petroleum Limited (ASX: WPL) is bucking the trend
While shares in Beach Energy Ltd (ASX: BPT) and Santos having been smashed 44% and 47% respectively in the last six months, shares in Woodside Petroleum have held relatively firm, down just 19%. Why?
Woodside's production mix is heavily weighted towards natural gas and LNG production and has it benefited from a gradual lift in contracted pricing for LNG at the flagship Pluto LNG project throughout the year.
Bloomberg also cites a UBS report noting that the lag between the price of oil and LNG prices means that pricing for Woodside's fourth quarter LNG production was tied to oil prices from the prior quarter.
- Massive asset write downs are coming
Think low earnings are the worst of it? Think again. The next phase of lower oil prices is the shelving of un-economic projects and massive write downs on assets like oil fields which are no longer productive.
The Wall Street Journal reports that London-based Tullow Oil will be taking up to US$2.7 billion in pre-tax write offs and is directly attributing US$600 million to the lower oil prices. Chief Executive Aidan Heavey is quoted as saying: "[We] wrote virtually everything off that we felt was either not commercial at $50 a barrel oil or where the [license] terms needed to be adjusted to make them commercial in the future".
Last week Woodside Petroleum noted it will take write-downs of up to US$400 million for the financial year 2014 (FY14) which is a similar amount to the year prior.
