Corporate Winners And Losers

Author: Tiziana Barghini
Gheit, Oppenheimer: The market’s fundamentals do not support oil prices significantly above the current level.
Tuvey, Capital Economics: Oil prices would have to fall much further before the Gulf’s current-account position would swing from surplus to deficit.


In mid-December, General Electric released, for the first time in years, an earnings forecast. In it the company predicted that its aviation, power and water, and other industrial units will compensate for declining revenues from its oil and gas businesses. GE, which provides drilling, compressors and other equipment, made just under 12% of its 2013 total revenue from the sector, and its shares have been hit recently by the sharp price decline. GE expects 2015 earnings in a range of $1.70 to $1.80 per share. Its attempt to get out in front of events and reassure shareholders isn’t unique. Corporates are worried about—and proactively managing—the impact of falling oil prices.

From a country perspective, all oil exporters have been suffering from the slump in oil prices since 2014, but some of them, mainly Venezuela and Russia, are set to lose the most because of their high dependence on oil exports combined with a lack of financial flexibility.

“Venezuela, Russia and obviously the Gulf Cooperation Council countries, Nigeria and Malaysia are countries which will be hit by the oil decline. And for some of them we have already seen [an] impact. We have seen the sell-off in Venezuelan bonds and the sell-off in the Russian ruble,” says Ades. Bank of America Merrill Lynch forecasts Russia’s GDP to decline 1.5% in 2015, a recession expected by other large banking houses as well. For president Vladimir Putin, who built his fortune on the high level of oil prices, plummeting oil revenue represents a big threat to his reign.

In Venezuela, the sharp fall in oil prices has combined with a lower level of oil export to create a drag on the country’s external reserves, adding to market tensions weighing on the Latin American country.

For the countries in the Gulf, oil prices can stay low for longer—but not without some impact on capital reserves. Oil prices would have to be sustained at low levels over the medium-term before the Gulf’s current-account position would swing from surplus to deficit. “Even then, large FX reserves provide a comfortable buffer,” notes Jason Tuvey at Capital Economics in London. For Saudi Arabia, the world’s second-largest exporter, the oil sector is now a drag on economic growth but the country’s savings are such that it will be able to comfortably absorb the shock while gaining market share on the
worldwide oil market.

A case apart is Mexico, because its diversified economy and its high integration with the US economy will make it possible to benefit from lower oil prices. But its energy reform, a once-in-a-lifetime attempt to open up the sector to international investors, will attract fewer investments from abroad if oil prices stay at current levels. “The view from our [Mexico] economist is that most of the new fields that they are trying to open up have break-even prices which are below $80 per barrel, and so they [may] still [be] profitable—of course less profitable than they were when oil was at $110 or $115,” says Ades. “We still see $10 billion of FDI [a year] coming to Mexico on the back of the
energy reform.”

As Global Finance was going to press, Brent oil prices dropped below $60 a barrel. Should such low prices be sustained, most oil-producing markets—including Mexico—and oil-related sectors are likely to feel the pinch. n


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