Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

So the week ended on a high note with those jobs numbers. They didn't do much for oil, though, which closed out the first week of February down (although it is still a fifth higher than its mid-January, mid-$20s low point).

New Year's Fray
Nymex crude oil has had a volatile and weak start to 2016
Source: Bloomberg

Maybe traders fear that a healthy job market portends higher interest rates. Such anxiety isn't mere paranoia: Projected oil demand growth this year rests overwhelmingly on emerging markets, which tend to sicken as the Fed raises rates.

Or perhaps it was this week's set of official U.S. oil inventory numbers, showing that stocks of gasoline jumped by about 22.4 million barrels in January. Now, gasoline storage tanks nearly always fill up a bit in January: Inventories have dropped that month in only two years since the Second World War. Still, you can't help feeling a little nervous when the latest increase was the biggest for a January since 1993, when Hillary Clinton's husband was just getting settled in at the Oval Office.

Bubba's Back
This January's build in U.S. gasoline inventories is the biggest for that month in any year since 1993
Source: Energy Information Administration

But maybe the truly unsettling news came from those who really have their fingers on the pulse of the market: oil producers.

Take Hess, which on Friday announced it had sold about $1 billion of new common stock, along with some other securities. Factor in the greenshoe, and the new common equity adds up to be about 10 percent of the current free-float. Hess duly slumped by as much as 11 percent on Friday.

Hess isn't the only exploration and production company tapping the market -- Pioneer Natural Resources did a bigger offering last month. What is notable is that Hess doesn't appear to be struggling right now. It ended 2015 with a net debt-to-capitalization ratio in the mid teens, which is very good for the sector; rival Anadarko Petroleum's ratio is 49 percent, for example.

Granted, even with a 40 percent cut to Hess' capital expenditure budget this year, it looked set to have a funding shortfall, with the consensus forecast for free cash flow being negative $1.1 billion, according to numbers compiled by Bloomberg. Still, it might have relied more on asset sales and some extra borrowing to close that gap, rather than opting for hefty shareholder dilution after the stock has already taken such a beating.

Sell Low
Hess' share price has fallen by almost half over the past year
Source: Bloomberg

The day before, ConocoPhillips also opted to take its licks, cutting its dividend by two thirds. Its shares have since fallen by almost 15 percent. The dividend cut was certainly the prudent thing to do, what with Conoco's debt-to-capitalization ratio having jumped from 30 percent to 38 percent over the course of 2015.

Still, no executive likes telling shareholders they will be getting (a lot) less cash than they expected, especially as Conoco's relatively high dividend has been the extra twist it offered investors since splitting to become a pure E&P company in 2012. Since then, shares in the old Conoco's constituent parts have still held up better overall than those of integrated peers Exxon Mobil and Chevron. Risking that by capitulating on the dividend is a big step to take.

And Conoco wasn't the only one cutting distributions this week. Mighty Exxon, with a much more pristine balance sheet, didn't cut its dividend but suspended share buybacks, which have been its calling card for years. The move may be driven partly by a desire to conserve firepower for acquisitions as fire sales take hold in the E&P sector. But with the risk of losing its triple-A credit rating now looming over the company, Exxon's decision also has that distinctive sound of hatches being battened down.

All in all, when oil major managers decide it is more palatable to take a beating from shareholders than risk any further strain on their relationship with creditors, it points to one thing: They aren't banking on oil to rally. Ryan Lance, Conoco's chief executive, summed it up thusly:

While we don’t know how far commodity prices will fall, or the duration of the downturn, we believe it’s prudent to plan for lower prices for a longer period of time.

There are signs that this is now sinking into hitherto bullish analyst expectations. While the consensus estimate for where oil will be when 2016 draws to a close is still about 18 percent higher than where futures trade, according to data compiled by Bloomberg, it has been slashed:

Christmas is Cancelled
Estimates of where oil will trade in the fourth quarter of 2016 have dropped sharply
Source: Bloomberg

Capitulation does, of course, carry the seeds of recovery. This week's message from the industry, though, is not to hold your breath

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net