Goldman Sachs talked to more than 100 investors about the historic oil market meltdown. Here are their top 5 questions — and what the firm thinks about each one, from dividends to the prospects for oil stocks.

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  • US crude oil traded in the negative double-digits on Monday for the first time in history, as contracts for oil to be delivered in May neared their expiration date. 
  • A collapse in global demand for oil wrought by the coronavirus pandemic has been forcing prices into the ground since March. 
  • Since oil started tanking, Goldman Sachs analysts have talked with more than 100 investors and answered five of their most pressing questions. 
  • The questions range from what happens to dividends among oil majors to how much a barrel needs to cost for the industry to survive. 
  • Visit Markets Insider to view the latest on oil prices.

For the first time in history, the price of US crude oil went negative, dipping deep into the red to settle at negative $37.63 per barrel on Monday evening — meaning, oil traders were actually paying buyers to take oil off their hands. 

A market quirk ultimately pushed the prices into the negative double-digits. 

The crude price that went negative was for oil to be delivered in May. Those contracts expire Tuesday, so on Monday, traders — who aren’t equipped to take physical deliveries — were rushing to sell them to buyers who do. 

The problem is that few buyers want oil right now.

That’s due to a trend that’s been playing out for several weeks: The coronavirus pandemic is destroying demand for oil, which is, in turn, causing oil storage tanks to fill up. We are quite literally running out of room to store oil. 

Read more:The price of US crude oil just went negative for the first time. Here’s what that really means and why it’s not free to fill up your car.

While the price of crude to be delivered in June and July has yet to go negative, it’s free-falling, too. On Tuesday morning, June contracts were down as much as 42% to under $12 a barrel. 

Unlike the market dynamics that hastened the price collapse on Monday, the demand crunch wrought by the pandemic isn’t abating anytime soon. 

Since the prices began to collapse in March, Goldman Sachs has interviewed more than 100 investors who are trying to make sense of the chaotic market. From these interviews, the bank compiled five of the most pressing and common questions that all of them are asking in a note Monday. 

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Floating-roof storage tanks that store oil are nearly full.

Orbital Insights


What do previous downturns tell us about this one? 

The price of oil has collapsed many times before. From 2014 to 2016, for example, the price of Brent, an international benchmark, fell from over $100 to just over $30, in part due to a lull in demand and a glut in supply.

In the wake of each meltdown, “Big Oil” equities have recovered, Goldman Sachs analysts, led by Michele Vigna, wrote in the note. 

“During those periods, Big Oil equities had initially moved abruptly lower, in line with the Brent oil price move, before eventually disconnecting and broadly stabilizing,” Vigna said.

But a recovery in oil company stocks will depend on when the price of oil rebounds, he said. 

“The timing from trough to a sustained recovery has differed depending on the length of the economic or commodity downturn,” he said.

It varies from 1.5 years, which is what happened in the last downturn, to about six months, such as after the financial crisis of 2008. 

What happens to the dividends of oil majors? 

The so-called “supermajors” — namely, BP, Total, Shell, ExxonMobil, and Chevron — have not cut their prized dividends in three decades, even during sharp economic downturns, Vigna said.

He doesn’t think this time will be much different. 

“We expect dividends to be secure on a fundamental basis in the current downturn as well, with improved balance sheet resilience and strong capital discipline further supporting cash flow generation and dividend preservation,” he wrote. 

In fact, he says that the supermajors may be in a better position to navigate the downturn this time around.

They’ve “exhibited strong balance sheet resilience over the past years, continuing to focus on de-leveraging, even after completing a few material acquisitions,” he said. 

Plus, the price per barrel these companies need, on average, to cover capital spending and dividends has fallen by as much as 60% since 2014, he said.

That’s particularly true for the European majors like Total, BP, and Shell, which have an average breakeven price of about $44 per barrel of Brent oil, he said. 

Nearly all of the top oil companies have also cut capital spending as a means to preserve their dividends. 

“While historically, capex cuts have mostly materialized in the one year-plus following an abrupt downturn in the commodity price, this time around, Big Oils have responded quicker to the commodity price move, having on aggregate already announced” about 20-30% of capex reductions,” he said. 

That being said, Vigna writes that “near-term credit metrics look challenging,” citing a free-cash-flow to debt ratio of just below 40%, on average, for the supermajors under a Brent oil price projection of about $35 a barrel for this year.

Nonetheless, Vigna believes that rating agencies will use a higher price-per-barrel benchmark in the long-term.

Read more:A top energy analyst says dividends of these 7 oil majors are unsustainable — and shares one metric that reveals the 2 companies most at risk

Negative oil prices won’t undermine the clean-energy transition, Goldman Sachs said.

Robert F. Bukaty/AP Photo


What happens to the low-carbon transition? 

Goldman doesn’t expect the oil price meltdown to reverse or significantly stall the energy transition. 

“The number of climate-related shareholder proposals has almost doubled since 2011 and the percentage of investors voting in favor has tripled over the same period,” Vigna said. “We expect a focus on the low-carbon transition to remain a key theme in the coming years, despite the current macroeconomic outlook.” 

On the flip side, he notes that financing for oil and gas projects has grown scarce in the last five years.

Reserve-based lending for exploration and production companies, for example, is down 90% from the peak, he said. Much of that money was redirected towards renewable energy projects. 

“The banks that were most active in reserve-based lending have substantially reduced their exposure to oil & gas and are mostly looking to discontinue hydrocarbon financing over the long term,” he said. 

Vigna also mentions that with oil majors like Shell and BP pledging to curb emissions they will be less likely to accelerate oil field developments. 

What price of oil does the industry need to survive? 

On average, countries within a coalition of oil-producers known as OPEC used to be the lowest-cost producers, Vigna writes. New projects in Saudi Arabia, Iraq, and Iran would break even at prices as low as $20 a barrel for exploration and production. 

While OPEC still has among the lowest breakeven prices for oil for exploration and production, these countries require a much higher price per barrel to balance their overall budgets, “reversing the competitive advantage of the 2010-14 period,” Vigna writes. 

In fact, that price is around $80 in 2020, he said. That’s $20 to $40 higher than what the supermajors need, on average, to meet capex and dividend requirements. 

“In this respect, OPEC’s relative position has deteriorated over the last few years,” he said.

Meanwhile, most oilfields in Goldman Sachs’ “top projects” database — which includes what the bank deems the most important oil and gas assets — have production costs below $15 a barrel, Vigna writes. 

“The Gulf members of OPEC occupy the lowest end of the spectrum, while Canadian and shale oil fields occupy the upper end of the production cash cost spectrum,” he said. “This is consistent with the regions that are more likely to be susceptible to shut-ins in a challenging macro commodity environment.”

OPEC headquarters in Vienna, Austria

Reuters


What does the record OPEC Plus agreement means for oil stocks?

Earlier this month, OPEC and its allies — a coalition called OPEC Plus — agreed to curb production in May and June by 9.7 million barrels per day (bpd), or about 10% of global oil supply. 

Relative to OPEC oil production in April, that deal represents a cut of more than 12 million bpd. Relative to production in the first three months of the year, however, it translates to a cut of only about 7 million bpd, the note said. 

That number slips even further when you consider that not all countries will fully comply with these cuts. 

Assuming full compliance from core-OPEC countries and 50% compliance by all other participants, Vigna said, the OPEC Plus voluntary cut would lead to an actual cut of just 4.3 million bpd, relative to production in the first three months of the year. 

“In other words, given the difficulty for most producers outside of core-OPEC to implement large cuts, the agreement leaves the voluntary cuts as still too little and too late,” he writes. “Ultimately, in our Commodities team’s view, this simply reflects that no voluntary cuts could be large enough to offset the 19 [million bpd] average April-May demand loss due to the coronavirus.” 

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