April 30, 2020
Good morning. Today's newsletter is bigger than usual at 1,709 words, but still, a quick 6-minute read.
Quick housekeeping note: Generate will be off tomorrow, but we'll see you again Monday. Have a nice weekend and we hope you're all safe and well.
And I'll depart from my usual trip to the record vault and select something new and oh-so-good from Texas as today's intro tune...
1 big thing: Why Big Oil is wary of Trump's aid plan
The American Petroleum Institute wants to avoid political baggage that could come from any special government program helping the beleaguered sector, Axios' Amy Harder reports.
What they’re saying: "Once you invite the government into these businesses, there are long-term repercussions for that, and I think that has weighed heavily on this industry’s mind," said Mike Sommers, API president and CEO.
The big picture: The oil and gas industry could see dozens, maybe hundreds, of bankruptcies in the coming months and years as the sector grapples with pandemic-fueled shutdowns choking oil demand, a recent analysis by consultancy Rystad Energy found.
- Even before the coronavirus crisis, many companies were doing poorly financially.
- Sommers indicated these firms should not get government support.
“We want to make sure if you were solvent going into this crisis and credit-worthy going into this crisis, you can survive this crisis. For some firms, that was not the case. I don’t think we’re interested in programs that would send good money after bad.” — Mike Sommers
The intrigue: Sommers, who represents the industry's largest trade group with more than 600 members, said broader emergency loan programs Congress has already created to help a range of troubled companies are sufficient for oil producers, too.
Most of the sector is opposed to special treatment given the longer-term political consequences, Sommers said.
- He shared a comment he said a CEO of one of API's members, a large independent oil and gas company, told him. "You can't ask for capitalism on the way up and then socialism on the way down," Sommers relayed.
- Sommers spoke to Axios as the White House prepared to offer details on a brewing aid plan aimed at smaller and medium-sized companies.
But, but, but: Not everyone in the industry agrees with API.
- Lee Fuller of the Independent Petroleum Association of America, which represents smaller and more U.S.-based producers, said his group would support a specific program if that’s what it would take.
- “We have a lot more companies in our membership that have been facing these struggles than perhaps API does,” Fuller said. “We’re trying to make sure they’re getting a fair shot.”
Flashback: Sommers recalled his time working on Capitol Hill during the government's response to the 2008-2009 recession, where a range of companies, including banks and automakers, received federal loans.
He referred to Jamie Dimon, CEO of JPMorgan Chase, which took $25 billion in recovery loans at the time.
- "Washington is littered with people who have taken these kinds of money from the federal government and most of the time they are still paying for that kind of government involvement," Sommers said.
- "Every time Jamie Dimon has to go to the Hill, he has to answer for that [Troubled Asset Relief Program] money he didn't want to take, that he was asked by the government to take," he said.
2. Where it stands: The brewing oil sector help
The contours of upcoming Trump administration efforts to help distressed oil producers are coming into sharper focus.
Driving the news: Here's Bloomberg on what's under discussion by Energy Secretary Dan Brouillette and Treasury Secretary Steven Mnuchin...
- "Brouillette, during a conference call Tuesday with an industry group, said Mnuchin was leaning toward aid that includes two separate programs — bridge loans and emergency lending authority through the U.S. Federal Reserve — designed to help smaller and medium sized companies."
Why it matters: The collapse in oil prices as the COVID-19 pandemic crushes demand is creating financial jeopardy for many independent companies and industry layoffs are mounting.
But a number of Democrats and environmentalists oppose propping up the sector.
What's next: President Trump told reporters at the White House Wednesday that the plan would be announced "shortly." Bloomberg reports that Brouillette and Mnuchin have already briefed Trump on it.
Threat level: The latest sign of jeopardy for U.S. producers, many of whom were already struggling before the crash, comes via Reuters.
"Chesapeake Energy Corp, the oil and gas exploration and production company that was at the forefront of the past decade’s U.S. shale boom, is preparing a potential bankruptcy filing as it grapples with an unprecedented rout in energy prices," Reuters reports.
3. A stunning energy shock and emissions decline
The COVID-19 pandemic is the "biggest shock to the global energy system in seven decades," the International Energy Agency said Thursday in unveiling a report that estimates big drops in energy use and carbon emissions this year.
What it found: IEA projects (with caveats because the whole thing is still unfolding) that global CO2 emissions will decline by 8% in 2020, or by nearly 2.6 gigatonnes, bringing them back to levels of a decade ago.
- That's six times more than the decline after the financial crisis over a decade ago and "twice as large as the combined total of all previous reductions since the end of World War II," the report notes.
- IEA is projecting a 6% decline in global energy demand as use of power and transportation fuels decline, "the largest in 70 years in percentage terms and the largest ever in absolute terms."
- Near-term reductions are much steeper, with IEA noting that countries in "full lockdown" are seeing an average 25% decline in weekly energy demand.
How it works: The pandemic is having an uneven effect on the energy landscape.
- Oil consumption is projected to see the sharpest annual decline on a percentage basis at 9% as the pandemic crushes demand for transportation fuels.
- Coal demand is projected to decline by 8%, with smaller reductions in demand for natural gas and nuclear energy.
- Only renewables see a slight uptick, "because of low operating costs and preferential access to many power systems," IEA notes.
What we don't know: How much those projections will match what ultimately unfolds.
- IEA cautions that its estimates assume a "widespread global recession caused by months-long restrictions on mobility and social and economic activity," and that "recovery from the depths of the lockdown recession is only gradual."
But, but, but: The Washington Post notes that some analysts have been surprised that estimates of emissions declines haven't been even steeper, given the pandemic-related activity restrictions.
“It’s a sobering reminder of how hard it is to get off of oil and decarbonize the global economy,” Jason Bordoff, head of a Columbia University energy think tank, tells the paper.
Bonus chart: The breadth of the coronavirus restrictions
One of the striking charts in the new IEA report helps to show why the response to the pandemic is having such a pronounced effect on energy use.
What it found: The graphic above shows the share of global energy demand in the pre-pandemic world that comes from countries now under major restrictions designed to slow COVID-19's spread.
"Worldwide, between mid-March and end-April the share of energy use under full or partial lockdown skyrocketed from 5% to 52%," IEA said.
4. Shell cuts dividends for the first time since WWII
Royal Dutch Shell said this morning that it's cutting shareholder dividends for the first time since World War II as the company reported a steep drop in quarterly profits.
Why it matters: The decision underscores how the pandemic-fueled collapse in prices and demand is upending the oil landscape and forcing even the most powerful companies to scramble to protect their finances.
- Shell, which like other companies is also steeply cutting capital spending, said in announcing the dividend cut that "the deterioration in the macroeconomic and commodity price outlook" due to COVID-19 is "unprecedented."
- "The duration of these impacts remains unclear with the expectation that the weaker conditions will likely extend beyond 2020," the company warned.
Driving the news: Shell said it would reduce its first quarter dividend to 16 cents per share, a 66% cut. If that reduction is maintained all year, Shell will save about $10 billion, Reuters reports.
The company reported $2.9 billion in Q1 net profits, which is down 46% from the same period a year ago.
What's next: U.S.-based multinational giants Exxon and Chevron report their earnings tomorrow morning.
* * *
This morning the big producer ConocoPhillips also announced a steep cut in profits and said it's significantly deepening its production cutbacks.
The company now plans to curtail net North American output by 420,000 barrels of oil-equivalent in June, nearly twice the reduction that's planned in May.
5. The frantic search for places to store oil
There is so much crude oil in the world and so little demand for it that owners of the oil are asking companies storing other liquid products — ranging from ethanol to vegetable oils — if they can rent their tanks, Amy reports.
The big picture: The odd development reveals how the novel coronavirus pandemic is upending the logistics running and feeding America. It’s not easy to convert storage, but it’s likely happening or will happen soon, experts say.
The intrigue: Kip Middendorf, managing director of Wolf Lake Terminals Inc., in Indiana, said he's been approached by owners of oil to use his tanks.
- "If they're finding a company like ours, they’re scouring the Earth looking for tanks," Middendorf said, noting the company is relatively small.
- "I have no doubt that a number of companies are repositioning their assets to provide this storage."
By the numbers: Middendorf, who is also chairman of the International Liquid Terminals Association, which represents all these companies, estimates that about 20% of the non-oil storage could be converted to crude oil storage.
6. Tesla profits and Musk swears in earnings reveal
Axios' Joann Muller reports that Tesla CEO Elon Musk launched into a mini-tirade about government stay-at-home orders during the coronavirus pandemic, calling them "fascist" and "an outrage" on an earnings call Wednesday.
What he said: "[T]he extension of the shelter-in-place or, frankly, I would call it, forcibly imprisoning people in their homes against all their constitutional rights — in my opinion — breaking people's freedoms in ways that are horrible and wrong and not why people came to America or built this country What the f*ck?"
- "Excuse me. Outrage. It's an outrage. It will cause great harm, not just to Tesla, but to many companies. And while Tesla will weather the storm, there are many small companies that will not. Everything people worked for their entire life are being destroyed in real time."
The big picture: Tesla posted its third straight quarterly profit, on strong sales of its Model 3 and Y, but said business disruptions caused by the coronavirus pandemic were clouding its outlook for the rest of the year.
The company eked out a $16 million net profit in the first quarter on $5.1 billion in revenue.
Why it matters: It's difficult for any company to forecast the future at this moment, but having raised $2.3 billion in February, Tesla said it has enough liquidity to keep investing in future products and long-term factory expansion.
- That could give Tesla extra momentum when the crisis finally passes.