Dow Jones/London
The collapse in oil prices is casting a long shadow both now and into the future for European energy companies, but it could
provide a timely boost for other sectors as the fourth quarter earnings season approaches.
Overall earnings on the continent-spanning Stoxx Europe 600 Index are expected to have risen during the most recent quarter, led
by banks, auto companies and makers of consumer durables. But profits at energy and utilities firms are forecast to decline
sharply, the first meaningful evidence of the damage plunging oil prices is wreaking on major Corps.
Fourth quarter earnings at big integrated oil companies, such as BP, Royal Dutch Shell and Total, are expected to fall an average
of 24% in US dollar terms, according to Barclays. In the UK, where there are a higher proportion of energy-sector earnings than
the rest of Europe, the slump in oil prices could take an average of 4% off fourth quarter earnings across FTSE 100 companies,
UBS said.
Executives and analysts say that might be only the start of a long period of bad news.
“Lower-for-longer oil pricing adds another layer of pain with near-term earnings,” said Nomura analysts in a recent note.
The pain is likely to be even sharper for smaller oil companies. Explorers with fewer assets are more exposed to falling oil
prices than majors like BP and Shell because they can’t rely on making money from other parts of their business when times are
tough.
UK-listed Tullow Oil said on Thursday it was making its largest-ever write-off, of $2.7bn before tax. Tullow in part blamed
unsuccessful drilling and lower oil prices for a $600mn write-down across all its assets, as well as $1.2bn related to ventures
that now have no prospect of commercialization.
Tullow’s move follows Premier Oil’s $300mn write-down on the value of its assets. The company also is likely to postpone an
investment decision on its $2bn Sea Lion development in the Falkland Islands to next year.
“Everyone in the industry is looking for cost savings,” said Tony Durrant, Premier’s chief executive.
While energy companies are the clear losers, the fall in oil prices is proving a boon for some sectors. Analysts say auto makers,
packaged-food companies and airlines – all of which count oil as a high proportion of input costs – are first in line to benefit.
Unilever, the world’s No. 2 consumer-goods company after Procter & Gamble, spends around €7bn ($8.23bn) a year on oil-based
products, according to UBS analysis. Germany’s Henkel estimates that around €4.9bn of its annual costs have high or moderate
dependence on oil prices.
Consumer-discretionary companies listed on the MSCI Europe Index, which is made up of the biggest companies from the 15 largest
economies in Europe, are expected to report a 16.5% increase in fourth quarter earnings compared with a year earlier, according
to FactSet.
For many companies, the benefits of a long-term decline in oil prices might be just beginning. Most are hedged on oil prices for
between three and six months, and some for more than a year, meaning the reduction in costs would show through only toward the
middle of 2015.
The shipping sector already is making gains from lower oil prices. The cost of bunker fuel – which powers ships and makes up
around 30% of costs for shipping operators – has halved to below $300 a tonne from $600 in September.
Denmark’s Maersk Line, the world’s largest container-shipping company estimates that a fall of $100 a tonne in bunker fuel adds
$100mn to annual savings. It is a similar story for airlines, for which fuel also represents about 30% of costs. Airlines
globally are set to spend 5.6% less on fuel this year compared with their $204bn combined fuel bill in 2014, even as they fly
more and consume more oil, the International Air Transport Association projects.
The benefit for airline earnings in Europe is more muted, though, with the strong dollar in which carriers pay for fuel
offsetting some of the oil-price slump. Hedging has a significant effect as well: Many European airlines lock in fuel contracts
early to have certainty over costs, which negates the immediate financial benefit.
Ryanair Holdings, the region’s biggest budget airline, said it already has hedged 90% of fuel consumption for the financial year
starting in April at prices above current spot rates.
The collapse in oil prices is casting a long shadow both now and into the future for European energy companies, including BP.
