CERAWeek: Oil majors still still working out debt, cash flow before new expansion
Petroleumworld.com 03 09 2017
Financially strapped oil producers are spending billions to boost production before it's clear that recent crude price gains brought on by OPEC output cuts can be sustained.
Five of the largest publicly traded oil companies - BP , Chevron, Exxon Mobil, Royal Dutch Shell , and Total - are trying to work down debts that totaled $297 billion at the end of December. That nearly doubled the companies' 2012 debt levels.
But even with oil prices about 70 percent higher than a year ago, most companies have yet to reach the point where their cash flow covers annual shareholder payouts and expansion projects vital to the industry's long-term survival.
Add other expenses, such as the interest on debt, and the break-even point is pushed out until at least 2020, industry analysts from Citigroup estimated.
"For the entire oil and gas industry, balance sheets have never been worse," said Fadel Gheit, an Oppenheimer & Co oil industry analyst. Producers, he said, "were in critical condition and have been upgraded to guarded."
For a graphic on oil majors' debt, cash flow and capital spending, see: tmsnrt.rs/2mzgTVc
For now, U.S. producers are taking advantage of the price increase spurred by OPEC's production cuts to boost their output. Some of the oil they are pumping would not have been profitable at $40 a barrel, but is with prices holding steady above $50.
The industry is betting that prices will maintain a delicate balance - high enough to repair balance sheets and finance new projects, but not so high that it creates a new glut.
If crude maintains a price in the mid-$50s per barrel, the biggest oil producers could see their cash flows increase by 71 percent on average over 2016, according to Citigroup.
The danger is that too many wells could come back online too soon, undercutting OPEC's effort to reduce global inventories. That could send prices back to the 12-year lows of early 2016.
U.S. shale producers in March are forecast to pump 79,000 barrels a day (bpd) more than in February, when shale contributed about 4.75 million bpd to U.S. output, according to the U.S. Energy Information Agency, reversing production declines last year.
Shale output could rise more than 500,000 bpd by the end of the year, said Daniel Yergin, vice chairman of analysis firm IHS Markit and an oil historian.
"U.S. shale has demonstrated that it's still a player," Yergin said in an interview. "It's going to continue to be a major factor in the global market."
Most majors are planning strong production growth until at least 2021, a Reuters analysis of the latest investor presentation and corporate plans showed.
The firms - Royal Dutch Shell, Exxon Mobil, Chevron, BP, Total, Statoil and Eni - plan to grow output by a combined 15 percent in the next five years.
It could take another year before the biggest companies' cash from operations exceeds their combined capital spending and dividends, Citigroup estimated. It projects the major oil producers will need to sell their oil for between $55 and $60 per barrel this year just to cover those two big costs.
Chevron Corp, which expects positive cash flow this year, says it could generate an additional $3.5 billion selling its oil at $55 a barrel, a figure predicted to be 2017's average price in a Reuters poll of analysts and economists.
Exxon Mobil Corp and BP have signaled they will spend more on expansion projects this year than in 2016, a sign of optimism about stronger pricing.
Higher production could deliver fresh money that can be used to hire workers, reduce debt or boost shareholder payouts.
It would also be a welcome turn for an industry that has been spending more cash than it generates and borrowing to pay dividends that shareholders expect, regardless of the state of the industry.
John Watson, Chevron's chief executive, said in late January he wants to "maintain and grow" the oil giant's dividend, calling it his top priority.
Chevron is winding down construction of several big projects, helping to stem its past spending rate and generate more revenue as new operations come online.
France's Total SA is raising its dividend by 1.6 percent this year, the first time in three years, and says it expects to cover its capital spending and cash dividend with oil above $50 a barrel.
The gains are driven largely by the OPEC output cut in November - the first in eight years. The agreement to reduce supply by about 1.8 million barrels a day runs through June, and OPEC and Russia are expected to review the cut in May.
Some analysts expect the agreement to be extended, but the cartel could just as easily resume higher production, squelching the industry's nascent financial recovery.
Torgrim Reitan, head of U.S. operations for Statoil - Norway's state-owned firm - said he has "stopped guessing" what OPEC might do in crafting the company's plans.
“We need to be prepared for volatility," he said in an interview at the CERAWeek energy conference in Houston. "This is the time for leadership in the oil industry, the time for making the right decisions that will fuel growth."
THE SHALE ADVANTAGE
Unlike the major producers, U.S. shale companies are better equipped to live with volatility. When prices rise, they ramp up drilling and lock in returns with price hedges, which Chevron, Exxon and other large producers typically don't do.
When prices fall, shale producers can more easily cut spending than the majors because of their small size.
Shale producers' ability to pour more of their new cash into production is feeding technology developments that allow them to squeeze more oil out of existing wells and at a faster pace than a few years ago.
"Those who withstood the storm and survived have learned just how nimble they can be," said Avi Mirman, chief executive of Lilis Energy Inc, a shale oil producer in west Texas.
Similar approaches are belatedly being adopted by the biggest producers. Chevron is embracing a short-cycle approach to investing in projects that can go into production in months, not years.
However, Alastair Syme, who tracks global oil and gas companies for Citigroup, cautions the continued cost reductions by shale producers could thwart OPEC's ability to prop oil prices through production cuts, undercutting the cash flows needed to rebuild.
"If shale producers can grow U.S. supply at between 1 million and 1.5 million barrels a day, it'll be a challenge for everyone to respond to that," he said in an interview.
Story by Ernest Scheyder and Gary McWilliams; Editing by Simon Webb and Brian Thevenot from Reuters.
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