Ron Bousso –
After a brief respite at the start of the year, the world’s top oil and gas companies are set to double down on cost cutting as a recovery in crude prices after a three-year slump falters.
Corporate hopes were raised by a deal between members of the Organization of Petroleum Exporting Countries and other non-Opec producers to cut production, which lifted oil prices above $58 a barrel in January, after they had slid to as low as $27 in 2016.
But Brent crude prices have since slipped back below $50 and banks have lowered price forecasts, amid surging output from the United States and other nations not bound by the global oil pact.
Investors are again focusing on the ability of top oil firms such as Exxon Mobil, Royal Dutch Shell and Total to live within their means and eke out profits when oil has failed to recover, as hoped, to $60.
The majors, often dubbed Big Oil, have already been through tough spending cuts since a collapse in crude prices since mid-2014 from above $100.
They have shed thousands of jobs, scrapped projects, sold assets and squeezed service costs.
The painstaking effort has paid off.
Net income for Exxon, Chevron, Shell, BP, Total, Eni and Statoil is set to double on average in the quarter ending June 30 from a year earlier, even though oil prices are back as similar levels, according to analyst estimates compiled by Reuters.
By early 2017, management teams said their operations in 2017 would cover spending and dividend payouts at $60 a barrel, although for many firms this included using scrip programmes, when investors can opt for dividend payouts in shares not cash.
“More of the Same”
But earlier savings may not now be enough, with Brent crude averaging below $50 in the second quarter and forecasts that the 2017 average will be $54.
While net income for Q2 may climb year-on-year, the quarter-on-quarter picture is different. Compared to the first three months of the year, the second quarter will see net income fall by about 20 per cent, according to analyst estimates.
“Given where oil prices are, 2017 is still a year of transition for these companies, and that is not necessarily supportive for investment,” said Jason Kenney, head of pan-European oil and gas equity research at Banco Santander.
“The sector needs to continue doing more of the same,” he said, referring to the ongoing need to reduce costs.
Dividend yield, the ratio between a firm’s dividend payout and share price, has risen in recent weeks to near recent highs as share prices have slipped, underscoring investor concerns. Shell, Statoil and Total kick off the Q2 earnings reports on Thursday, followed by Exxon and Chevron on Friday. BP reports on August 1.
Majors were targeting break even at $55 a barrel and could further cut spending by delaying investments, simplifying offshore and other project designs and selling assets, Kenney said. About two thirds of the industry’s capital expenditure went to new projects, with the rest used to maintain existing output, Kenney added.
“Off Life Support”
Company boards have taken different approaches to deal with the bumpy oil price recovery.
Exxon and Chevron have invested in US shale oil in recent months, seeking to benefit from the relatively low development cost and the short time it takes to extract commercial oil.
Across the Atlantic, Shell, BP and Total have focused more heavily on cutting costs of large, deepwater oil and gas projects to compete with the low-cost shale. — Reuters