Oil majors may need to face up to further cost cutting as they prepare to release their second quarter results, according to one expert.
Iain Armstrong, equity analyst at Brewin Dolphin Securities, believes that unless there is a “significant” change in the oil price environment, further cuts are inevitable.
His comments come as BP and Shell prepare to update investors on Q2 of 2017.
Mr Armstrong, said all eyes are on the Downstream and LNG sectors this quarter.
He said: “With the weakness in oil and gas prices during the quarter all the focus is on downstream and LNG. Lower oil prices help input costs and demand has been okay after a poor Q1.
“We think there should be sequential improvement in refining, marketing and chemicals margins across all the regions, including Europe. Some of the benefit will be lost due to essential maintenance.
“However, weaker oil prices will mean that operating cash flow will be weaker sequentially for the majors, although significantly strong year-on-year.
“Part of this will be due to the catch up of unusually low capex in Q1. Nearly all the sell-side analysts have cut their medium term forecasts for oil resulting in some spectacular declines in EPS and more importantly cash flow for the next few years.”
He added: “Hopes for a balancing in the oil market in H2 are fading fast but be would caution being too bearish given the lag in actual reporting compared to the speculative observation of full tankers leaving US ports.
“Unless there is a significant change in oil fundamentals (change of attitude by the US producers, deeper cuts by OPEC or an unusual sharp uptick in demand) the oil majors will have to cut costs further.
“A willingness and a capacity to do so in potentially sub $50 oil world will be the key messages in the Q2 results.”
Shell will release Q2 results later this week. BP follows next week.
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