European oil companies experienced a difficult second quarter in 2013 and this prompted analysts to project a bleak outlook for the remaining part of the year. European integrated oil companies were hit by declining petroleum prices and high taxation in the second quarter. Individual companies operating in the EU reported negative earnings on the basis of certain factors.
European oil companies see cuts to fiscal earnings expectations
“A difficult second quarter prompted analysts to make further cuts to fiscal 2013 earnings expectations for European oil companies. Lower oil prices and production, coupled with less beneficial exchange rates, caused a reduction in sequential profits. At the same time, tax costs, impairments and inventory revaluation were the main surprises. Some smaller business segments fared better, though not sufficiently well to reverse gloomy overall results,” reports Philipp Chladek.
British Petroleum reported lower than expected earnings on account of higher taxes, lower contribution from Rosneft’ NK OAO (MCX:ROSN) and higher spill charges. Rosneft’ NK OAO (MCX:ROSN) saw low earnings due to high costs, unfavorable foreign exchange changes and weak oil and product demand.
Oil companies affected by civil unrest in Nigeria/Libya
Eni SpA (NYSE:E) (BIT:ENI) also reported lower than expected earnings on falling oil prices and the civil unrest in Nigeria and Libya. Furthermore, Eni SpA (NYSE:E) (BIT:ENI) also said that the lower oil product and power demand in the EU threatened its volumetric sales and resulted in lower than expected earnings. Statoil ASA (NYSE:STO) blamed its declining earnings on low prices, weak trading results and weak refining numbers.
Oil hampered by Russian strategic asset law
The Russian strategic asset law continues to hamper foreign corporations entry into their market. This means that the growth in the emerging market of Russia is still limited.
“Lundin’s 2008 oil discovery in the Russian section of the Caspian Sea was deemed a strategic asset by the Russian government because of its offshore location. As a result, a state-owned company is required to take a 50% stake prior to appraisal and development of the discovery. Lengthy negotiations harm the attractiveness of Russia as an area of operations for foreign companies, such as Lundin or MOL,” analyzes Philipp Chladek.
A number of other factors threaten the growth in Europe. These include unplanned North Sea output shutdowns and the lack of growth in Western Siberia. The complexity of extracting oil from the North Sea offshore areas has led to production outages in this area. This means reduced output for Total, Dong Energy and Abu Dhabi National Oil which have major stakes in the area.
Western Siberian oil at peak production
Western Siberia, one of the oldest oil fields in Russia, is at its peak production. LUKOIL (OTCMKTS:LUKOY) recently reported that the area offered no more growth potential unless enhanced oil-recovery technologies are applied. Such technologies are difficult to implement in Russia due to the regulatory issues in the country.
Due to these factors and the negative financial results of European firms in the second quarter 2013, analysts have cut the 2013 EPS estimates for European integrated oil and has firms by more than 1.5 percent. Analysts are increasingly bearish on both international oil prices and the demand in Europe despite a projected recovery in European economies. Companies that have higher shares in emerging markets may be able to survive better in these difficult times than companies which are solely focused in the bearish markets of Europe.