Local companies weigh impact from oil's decline

Posted at 12:53 PM, Jan 26, 2016
and last updated 2016-01-26 12:54:28-05

CINCINNATI - It seems a no brainer that falling oil prices would benefit a company that ships products all over the globe in plastic containers, but things are always more complicated for Procter & Gamble Co.

Lower oil prices reduced P&G's input costs by $500 million in the last three months of 2015, but those gains were offset by increased instability in oil-producing countries, including Saudi Arabia, Russia and Venezuela, said Chief Financial Officer Jon Moeller.

“I would say on average the commodity price reduction or oil price reduction has been a neutral to negative,” Moeller said. “But it’s hard to tease out each of those pieces with great specificity.”

Crude prices are down more than 60 percent since June, 2014. More than 250,000 oil workers have lost their jobs and oil-producing countries are taking on high-interest debt and hoping for a recovery. U.S. consumers, meantime, are enjoying a gas-price dividend, with more disposable income as average prices at the pump approach $1.50 a gallon in the Midwest.

P&G isn’t the only Cincinnati-based company coping with the plunging price of oil. Executives from three other local companies used the word oil more than 60 times in three recent earnings calls.

Fifth Third Bancorp., for example, has a $1.7 billion portfolio of loans to energy companies.

“We are monitoring our energy portfolio very closely,” Chief Financial Officer Tayfun Tazun told analysts Jan. 21. “So far, we had no exposures to any of the (exploration and production) companies that have filed for bankruptcy.”

Ashland Inc. CEO William Wulfsohn said “reduced demand for oil and gas-related products” had a negative impact on its first-quarter earnings, announced Jan. 22.

“Clearly, oil pricing is a concern, and will have an impact,” General Electric Co. CEO Jeffrey Immelt told Wall Street analysts Jan. 22. “But our organic orders growth in the Middle East were up 14 percent in the quarter, so economic activity is ongoing.”

Immelt said G.E. has a large backlog of orders for machines and services in the oil and gas industry, but is prepared to aggressively cut costs in drilling and production segments that could quickly erode if oil prices stay low.

Moeller said oil prices impact P&G’s business in three ways: Reducing raw materials cost, increasing consumer spending and causing unrest in oil-producing countries where P&G operates.

“The commodity impacts aren't as significant as you would assume just looking at the headlines on oil prices,” Moeller said. “If you look at everything from diesel to resin the other imports that are derived from the petro complex, while pricing benefit or cost reduction has occurred, it is not anywhere near the level yet of the crude price reductions.”

P&G is benefiting from increased consumer spending in the U.S., which Moeller described as a bright spot in the second quarter, posting 3 percent organic sales growth. As falling gas prices give U.S. consumers more cash in their pockets, P&G is having success with premium-priced products, including Gillette’s Fusion ProGlide, in which P&G has invested heavily in the last 18 months with new product innovations and a sampling program that delivered Flexball razors to 25 million men.

“Flexball has been an important catalyst of growth on ProGlide cartridges,” Moeller said. “ProGlide cartridge sales grew 18 percent last fiscal year compared to a 7 percent decline in the overall male cartridge market.”

But those advantages are being offset by rising instability in countries where oil pays the bills. That leads to reduced spending by consumers and currency fluctuations that wipe out P&G profits.

“There are more flashpoints across the globe than in any time in recent memory with significant economic and political instability impacting incomes and consumption in many large and important markets,” Moeller said. These include “Russia, the Ukraine, Egypt, Saudi Arabia, and the balance of the Middle East, Turkey, Nigeria, Argentina, Venezuela, and Brazil.”

P&G entered its 2016 fiscal year expecting growth of 3 percent to 4 percent in developing markets. Half way through the year, it now expects growth of 2 percent to 3 percent.