Oil companies aren't out of the woods yet

Posted October 27, 2020 8:14 a.m. EDT

— It wasn't long ago that the steepest plunge in demand in history erased profits at big oil companies and forced them to dramatically cut costs.

In recent months, the environment has improved. Easing Covid-19 restrictions have boosted demand for energy, especially in Asia, and moves by top producers to slash output have helped stabilize prices.

What's happening: Oil giant BP reported Tuesday that it eked out a small profit last quarter. In the previous three months, it posted a loss of $6.7 billion.

"After a sharp contraction in the first half of the year, there have been some early signs of global economic recovery as countries move to more regional or localized restrictions on movement," Chief Financial Officer Murray Auchincloss said on a call with analysts. Shares in London rose 1%.

BP said that Brent crude futures, the global benchmark for oil prices, averaged $43 per barrel in the third quarter, a 45% increase compared to the second quarter.

But the path forward for oil companies remains murky. A recent surge in coronavirus cases in North America and Europe "is creating some uncertainty," Auchincloss noted.

UBS analyst Giovanni Staunovo told me that the current environment is best described as a "delicate balance." On one hand, Asian demand is effectively back at pre-pandemic levels, he said. But new restrictions on movement in the West, which could lead to less commuting, pose a threat.

Oil companies also have to contend with longer-term shifts in oil consumption — including the possibility that demand for crude will never recover fully.

BP made clear that it plans to stay the course on its business overhaul announced earlier this year, which is predicated on an expectation that oil demand may have peaked in 2019. The company has pledged a 10-fold increase in annual low carbon investments to $5 billion by 2030.

That may help BP down the line. The company's near-term outlook, however, remains tricky.

"An uptick in global demand for oil has certainly helped, but there is still a huge task ahead for the company to make the pivot to a green energy future while grappling with the collapse in the oil price," Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, told clients Tuesday.

Staunovo expects Brent crude to end the year at $45 per barrel. That would still be 32% below where prices were at the beginning of 2020.

Coming up: How is the rest of the industry faring? We'll find out later this week, with Royal Dutch Shell, Total, ExxonMobil and Chevron all due to report.

Ant Group to raise $34 billion in world's largest IPO

Jack Ma's Ant Group is pulling off the biggest share sale in history, marking a huge win for the Chinese tech champion and the country's stock market.

Details, details: The tech company behind China's largest online payments platform priced its dual listing on the Hong Kong Stock Exchange and Shanghai's Star Market at 80 Hong Kong dollars ($10.32) and 68.8 yuan ($10.26) per share respectively, according to regulatory filings released Monday.

That means the initial public offering will raise some $34.4 billion and value the company at more than $310 billion. The previous record for an IPO was held by Saudi state oil company Aramco, which raised $29.4 billion when it issued shares on the Riyadh exchange last December.

Big picture: The share issue is a boon for Beijing, which has been encouraging the country's top tech companies to list at home instead of in the United States, where scrutiny of Chinese companies is rising as a long-running trade war rumbles on.

Beijing hopes that Ant's decision to sell 1.67 billion shares in both Hong Kong and Shanghai, or about 11% of the company in total, will attract the seasoned institutional investors it has long courted. That strategy appears to be working.

Ant is closing its Hong Kong institutional book building on Wednesday, a day earlier than scheduled, because of strong demand from global investors, a source familiar with the matter told CNN Business. The Hong Kong shares were oversubscribed within the first hour of pricing.

The Ma touch: This is the second time Ma — who has "ultimate control" over Ant — has pulled off a record-shattering IPO. (When Alibaba made its debut on the New York Stock Exchange in 2014, it was the biggest stock raise to date.)

If you live in China, "you're going to be touching the companies that Jack founded pretty much every day, and almost every hour in some cases," Duncan Clark, author of "Alibaba: The House That Jack Ma Built" and chairman of investment advisory firm BDA China, told my colleague Sherisse Pham.

Watch this space: According to regulatory filings, Ma will hold an 8.8% stake in the company worth more than $27 billion post-IPO. Bloomberg estimates that the 56-year-old's fortune will soon hit $71.1 billion, positioning him as the 11th wealthiest person in the world.

Stock market volatility is back again

Readers of this newsletter were advised to brace for a volatile trading week. That started Monday.

The Dow Jones Industrial Average logged its worst day since early September, when tech stocks experienced a sharp correction, as fears about rising infections across the United States and Europe unleashed fresh anxiety about the trajectory of the pandemic.

While investors remain optimistic on the development of a viable vaccine, new restrictions on movement and businesses have the potential to halt the nascent economic recovery. Hopes that US politicians can agree on another stimulus package before next week's election are also fading.

The latest: White House adviser Larry Kudlow said on CNBC Monday that talks have "certainly slowed down, but they're not ending." A spokesperson for House Speaker Nancy Pelosi said she spoke with Treasury Secretary Steven Mnuchin for 52 minutes. But with the election just one week away, a deal looks increasingly improbable.

"Equity investors proved that talk is cheap," said Charlie Ripley, senior investment strategist for Allianz Investment Management. "With the US election next week, virus cases rising across the globe and the lack of an agreement on stimulus in Congress, it appears market participants have shifted toward a risk-off tone."

Coming up: The VIX, a measure of S&P 500 volatility, remains near its highest level in nearly two months. That indicates the turbulence could continue.

Up next

3M, Caterpillar, Eli Lilly, Harley-Davidson, Merck, Pfizer and Xerox report results before US markets open. Microsoft follows after the close.

Also today: US durable goods data for September posts at 8:30 a.m. ET, followed by data on US consumer confidence at 10 a.m. ET.

Coming tomorrow: Boeing, GE and Mastercard report earnings.

Our commenting policy has changed. If you would like to comment, please share on social media using the icons below and comment there.