FEATURE: Q4 US oil earnings likely to focus on recovery, Biden transition

Houston — Fourth-quarter 2020 earnings calls for US oil upstream, midstream and downstream operators will likely reflect two unique broad themes besides the usual full-year capital spending and business outlooks: plans around policy changes expected from a new US presidential administration, and the pace and extent of recovery from the pandemic.

With oil prices holding above $50/b, thanks in part to an unexpected 1 million b/d production cut set for February and March by Saudi Arabia, 2021 could be a transition year for the industry.

2020 was dominated by the pandemic, with companies focused on survival, cutting spending and limiting growth, but the year's final quarter was somewhat upbeat. A vaccine for the virus was unveiled late in the year, and drilling ticked up and oil consumption rose, all while US shale and OPEC+ production decreased.

"Accommodative monetary policy, aggressive fiscal stimulus, and pent-up travel demand after the lockdowns will combine to more than offset some of the structural work from home changes that COVID has inspired," said Ethan Bellamy, energy strategist at East Daley Capital, citing President-elect Joe Biden being bullish for oil prices. "We're a social species, not a bunch of misanthropes, and we need fuel to see each other and to execute commerce."

The following are topics industry watchers will likely be focused on during Q4 calls:

Upstream drilling limits, spending plans

• The incoming administration may rein in new drilling on US federal lands and end subsidies for fossil fuels in the first year of Biden's presidency. Those commitments made during his campaign sparked a rash of new permit applications for wells on federal lands in H2 2020 as operators sought to get future activity approved before the curtain of opportunity fell.
• Most E&P operators have said they either have few federal leases or can easily shift activity to privately held lands, but experts may probe CEOs for more details as more becomes known after Biden's inauguration Jan. 20.
• The subsidies plan likely scraps deductions for intangible drilling costs and raises tax rates, both with a probable "minor" impact, said Wells Fargo analyst Nitin Kumar, who estimates roughly 4% higher effective tax rates.
• While most E&Ps have said they will maintain flat to slightly higher activity in 2021, the question for executives is how much $50-plus/b oil changes those plans. Upstream executives in 2020 pledged spending austerity—even at $50/b—and slimmed capex by 40%-50%.
• Full-cycle breakevens for US shale and offshore Gulf of Mexico were at $50/b Brent-equivalent in 2020, according to S&P Global Platts Analytics.
• "It may take closer to $60/b WTI for public company discipline to erode," Goldman Sachs analyst Brian singer said in a Jan. 11 investor note.
• Until the oil price rally, flat to slightly higher capex was expected in 2021. In its annual Global Upstream Spending Outlook released last month, Evercore ISI projected US E&P spending up about 5% this year and said the risk was to the upside as oil prices gained traction. Since the survey was released, WTI has climbed about 15% to above $53/b.

• While oil and gas production is the bread and butter of upstream independent producers and not something they handle for others, they are still spending on more energy-efficient equipment, cutting emissions and even using less fossil fuel to run their own operations – which also often save money.

• And in recent years, lenders and investors have cast greater scrutiny on fossil fuel providers for their attention paid to climate change. At the same time, the risks of lending to E&P operators have risen dramatically with nearly four dozen upstream North American producer bankruptcies in 2020 from low oil prices that are mostly pandemic-related.

Midstream lull, threat to KXL

• The midstream crude sector mostly completed a large build-out of long-haul pipelines, storage hubs and onshore export terminals in 2020. And the global collapse in crude demand from the pandemic pushed back even more the need for additional North American infrastructure. As a result, spending discipline seems a likely key item to watch as firms focus more on capital discipline and free cash flow.
• Biden is expected to cancel the permitting for the controversial Keystone XL Pipeline project as soon as Inauguration Day on Jan. 20, according to transition team documents.
• The competing Line 3 replacement project by Enbridge is under construction and slated to come online late in 2021, perhaps further rendering KXL less necessary.
• The legal effort to shutter the four-year-old Dakota Access Pipeline from the Bakken is ongoing, and federal court rulings could come any day now.
• US crude exports trended down during the pandemic, so the paused race to build deepwater crude export terminals offshore of Texas could resume later this year. Companies with more exposure to export markets, such as Enterprise Products Partners and Energy Transfer, are best positioned to win longer term, said AJ O'Donnell, manager of capital markets at East Daley Capital.
• Following the upstream merger wave, the next round of industry marriages could move to the midstream sector in 2021. "In North America, higher prices likely narrow the bid-ask spread on upstream and midstream assets that has prevented some consolidation and development. So, more M&A," Bellamy said.

Refinery rationalizations, RVO uncertainty

• According to Morgan Stanley, about 1.1 million b/d of US refinery capacity is "getting mothballed or permanently shut" and the possibility exists for more, with an additional 350,000 b/d "at-risk" based on location and complexity and dictated by the pace of demand recovery.
• The pace of refined products demand recovery remains uncertain, especially for jet fuel. Platts Analytics expects global oil demand to increase by 6.3 million b/d in 2021, but remain 2.1 million b/d below 2019 levels of 101.9 million b/d. Demand gains are weighted toward H2 2021, led by transportation fuels as more people are given access to the coronavirus vaccine and personal mobility increases.
• Renewable transportation fuels will eat into refined product market share. Expectations are that hydrocarbon-produced refined products will face competition from the growth of biofuels and natural gas liquids, which "basically substitutes for the need for refined products," according to Chris Midgley, global head of Platts Analytics.
• While refiners have sharply cut capital spending, much of growth capital is directed toward renewable projects. As an alternative to shutting down plants, US refiners have repurposed entire refineries or parts of their plants to make fuels like renewable diesel and sustainable aviation fuel, incentivized by existing and new federal and state credits expected to be enhanced after the Biden administration settles in.
• Renewable fuel standards and exemptions will likely be in the spotlight. The US Environmental Protection Agency missed the Nov. 30 deadline to finalize the 2021 renewable fuel mandate as required by law, bringing uncertainty into this year.
• The US Supreme Court will hear the first-ever biofuels case in 2021, following an appeal of a lower court ruling by HollyFrontier and CVR Energy which disallowed them the Small Refinery Exemption.