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BP. Bp Plc

495.70
2.90 (0.59%)
28 Mar 2024 - Closed
Delayed by 15 minutes
Share Name Share Symbol Market Type Share ISIN Share Description
Bp Plc LSE:BP. London Ordinary Share GB0007980591 $0.25
  Price Change % Change Share Price Bid Price Offer Price High Price Low Price Open Price Shares Traded Last Trade
  2.90 0.59% 495.70 496.00 496.10 498.75 493.30 495.45 36,110,224 16:35:27
Industry Sector Turnover Profit EPS - Basic PE Ratio Market Cap
Petroleum Refining 211.6B 15.24B 0.8934 5.55 84.61B

Oil Companies' Spending Cuts Unlikely to Be Enough

04/08/2015 9:56pm

Dow Jones News


Bp (LSE:BP.)
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By Sarah Kent And Erin Ailworth 

LONDON--The world's biggest oil company's have vowed to bring down the costs of big projects in the face of slumping oil prices, but the unrelenting price weakness--with crude below $50 a barrel--suggests they could have to dig deeper still.

In the past year, as oil prices plunged 60% from highs of $114 in 2014, U.K. energy giant BP PLC began testing new projects for profitability around $60 a barrel, down from $80 a barrel last year. Its Anglo-Dutch rival Royal Dutch Shell is testing projects at prices as low as $50 a barrel, though its overall price outlook is between $70 and $110 a barrel.

Total SA of France said this year it had cut its break-even oil price by more than a third, to $70 a barrel from $110 last year.

Under other circumstances, those would seem like draconian cuts. Billions of dollars less is being spent on everything from exploration and project engineering to construction equipment and drill rigs.

But last week, when all of the world's biggest oil companies reported quarterly earnings far lower than last year's, and a loss in BP's case, chief executives said they would keep the pressure on spending as oil traded below even their new price assumptions. Some, such as Shell and Chevron Corp., announced layoffs.

"We don't have a crystal ball but we are planning for a prolonged downturn," Shell CEO Ben van Beurden told reporters last week, when the company said it would shave 6,500 jobs. "Let me assure you we have further levers available if macroeconomic conditions deteriorate further."

Brent crude, the international price benchmark, was hovering just above $50 on Tuesday, after crashing below that level earlier on. West Texas Intermediate, the benchmark for U.S. crude, has been below $50 for nearly two weeks.

Focusing on lower-cost projects with higher returns will help to some extent, but companies are also relying on cost deflation for everything from drill rigs to pipelines, improved efficiency and increased standardization to help manage the lower price environment.

"They are bringing down their costs both operationally and also in terms of capex, but it's probably not going to be enough," said Roberto Cominotto, investment manager at Swiss investor GAM, highlighting the need for a structural shift in the way big oil companies operate after years of diminishing returns as production costs crept higher.

The recent decline in oil prices reversed a rebound in the second quarter that gave oil investors and executives a glimmer of hope after a price crash that began last year brought oil to less than $50 a barrel. It had traded at around $100 a barrel for three years, a historically high level. At current prices, the world's biggest oil companies can't afford to cover their costs for pumping crude and pay their shareholders' dividends from the cash they generate.

Though prices are widely expected to rebound over the coming years, and oil companies tend to take a long-term view rather than focus on day-to-day changes in the market, the current weak prices illustrates the risk that the market could remain under pressure for longer than anticipated, driving prolonged pain and the need for more stringent action among Shell and BP in Europe and American giants such as Chevron and Exxon Mobil Corp. Their focus remains on driving down capital expenditure and continuing to reduce costs, the benefits of which oil companies say could begin to show through by the end of this year.

In the U.S., energy producers have proven more resilient than expected, finding ways to lower drilling costs even as they have reworked hedge programs and issued equity to bolster their balance sheets. But pressure is mounting.

As hedges--the financial contracts that buffered companies from falling prices--begin to expire this fall, companies may need to cut their spending again to deal with sub-$50 oil, analysts say, and likely would find it more difficult to snag a lifeline from lenders.

What the industry really needs is a shakeout, said David Tameron, an analyst at Wells Fargo Securities. Too many energy companies, particularly in the bottom tier, have been able to hang on through the downturn with the help of financial backers.

"You need that wash out," Mr. Tameron said. "You need some producers to go away."

Even with a partial rebound, some aren't sure that will be enough to prompt companies to ramp back up.

"I'm not sure we as a company--and I don't believe we as an industry--are anywhere close to the types of margin improvements that are need before we go back into growth mode," Al Walker, chief executive of Anadarko Petroleum Corp. in Texas, told analysts last week.

The prospect of tougher cuts down the line is a sign that the severity of the situation is dawning on the industry.

"Although they're still not willing to abandon their rosy forecasts, at least they are addressing the near term situation that we have to do something now and not wait for oil prices to recover," Oppenheimer & Co. analyst Fadel Gheit said of the major oil companies.

He said it won't be easy. "It's a monumental challenge to offset the impact of a 50% drop in oil price," said Mr. Gheit. "The priorities have shifted completely. The priority now is to discontinue budget spending. The priority is to live within your means. Forget about growth. They are now in survival mode."

Write to Sarah Kent at sarah.kent@wsj.com

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