Corporate Winners And Losers
THE OIL DIVIDEND: CORPORATE WINNERS AND LOSERS
The drastic drop in oil prices will clearly have an impact on both individual companies and on overall growth in some countries. But is the shift net positive or negative, cyclical or systemic? The ultimate outcome is yet to be seen.
Transporting Campbell soup across the United States requires a large number of trucks and an even larger number of gallons of diesel. Campbell is clearly one company that will benefit from the nearly 40% decline in oil prices between July and December—but only after soup for the winter has been delivered. “Since we are often locked into long-term contracts, we do not see an immediate impact,” says Ashok Madhavan, treasurer for Campbell Soup. Eventually, he said, if oil prices stay low, the lower diesel costs will be reflected in the six-month contracts that Campbell sets up to outsource soup delivery across the country.
Dividends from the decrease in oil prices (which went below $60 a barrel in December) are slowly infusing the world economy, spreading from industry to industry and from country to country, sometimes in convoluted ways. Whether the sharp decline—which pushed the cost of Brent, the major benchmark price for oil worldwide, to a five-year low in December—is here to stay or whether prices rebound, companies and markets are experiencing the impact.
The global economy is mostly enjoying the windfall coming from the lower cost of oil, but oil exporters and countries and sectors associated with them clearly will emerge as losers.
Stock markets ultimately reacted poorly to lower oil prices: Investors had to discount lower earnings for oil companies, which are so widely represented in overall stock market volumes that they offset the positive impact across those sectors that received a boost from the price drop—such as retailers, food companies and virtually all oil consumers.
Managing investors’ expectations is the priority, says Pier Francesco Facchini, chief financial officer at Prysmian, the world’s largest cable maker. “The first important thing to do is to inform investors of what is the real exposure. In our case the exposure in terms of revenue and profit is 5% of the total, and so relatively low,” Facchini says, referring to the revenue linked to cable sold to oil producers. “Even so, orders are done with a horizon of six to 12 months.” On the other hand, for Prysmian lower oil prices could mean lower plastic material costs.
The net conclusion is
that lower oil prices are unambiguously a positive for global growth.
~ Jeff Rosenberg, BlackRock
Forecasting the price of oil is practically impossible, and history is full of glaring and clumsy mistakes, but understanding the sharp decline in oil prices of the second half of 2014 is not rocket science. Demand and supply factors came together to produce the outcome. Demand has been lower because the world economy expanded less than expected, but also because of more efficient use of energy, a structural change that is bound to last. Supply has been larger for producers that are rebuilding capacity, such as Libya, but also as a result of the increasing capacity from US shale oil. Meanwhile, OPEC producers decided in November not to cut production, exacerbating the downward price pressure.
“I would not be surprised at all to see a rebound in oil prices of $10 or $15 from here [in the short term], but again, it is not going to be sustainable, because the market’s fundamentals do not support oil prices significantly above the current level,” Fadel Gheit, senior energy analyst at Oppenheimer, said in November 2014. Gheit, a veteran analyst in the oil market, sees oil prices ranging in the long term between $65 and $75 a barrel.
Downward weight on prices is expected to continue at least for the first part of 2015, when seasonal demand tends to be lower, says Antoine Halff, chief oil analyst for the International Energy Agency in Paris. “We do not expect that lower prices will cut production in the short term, and so we expect production to remain very strong,” he notes. “The wedge between supply and demand—the level of excess production—looks like it is going to increase in the first half of the year despite the pressure coming from low prices, and this should translate [into] a buildup of inventories and downward pressure on prices.”
Not all oil companies will suffer from the price decline. “Some companies’ IT budget will go up as a result of the lower oil prices, and some companies’ may come down, but more or less the two impacts will offset,” notes Navneet Govil, chief financial officer of Enterprise Solutions and treasurer at CA Technologies, of the effect on their primary business lines.