By Justin Scheck, Alex MacDonald and John W. Miller
Resource companies are facing renewed pressure to cut spending
and investor payouts after a deepening commodities rout erased
billions of dollars in shareholder value on Thursday.
Oil and mining companies that expanded rapidly over the past
decade when commodity prices soared have already slashed tens of
thousands of jobs and mothballed billions of dollars of projects.
Now they must search for new savings as their long-held hopes of
rebounding commodity prices fizzle on weak Chinese demand.
Mining companies "are still reacting to the reality that China
did not turn out to be the picture of ever increasing demand people
thought," Lourenco Goncalves, chief executive of Cleveland-based
iron-ore miner Cliffs Natural Resources Inc., said in an interview
Thursday.
Glencore PLC and Anglo American PLC have slashed their
dividends--a step big companies are loath to take for fear of
alienating big shareholders--after stock prices plummeted over
cash-flow and debt concerns. The world's biggest miner, BHP
Billiton Ltd., is facing similar pressures as iron-ore prices drop
and as it contends with the fallout from a deadly mine-dam breach
in Brazil last year. A BHP spokeswoman declined to comment.
Oil companies went through a big boom cycle over the last
decade, but they are now "in another one that's going to be down
for a while," BP PLC Chief Executive Bob Dudley told the BBC in an
interview aired over the weekend. A BP spokesman said the comment
is in line with Mr. Dudley's comments last year.
Oil prices have fallen by more than two-thirds since mid-2014,
dipping below $33 a barrel on Thursday before paring some of those
losses. Prices for major industrial metals such as copper and zinc
have fallen by 34% and 28%, respectively, since June 2014. China
accounts for roughly 45% of global demand for both metals.
A prolonged rout could be part of a shift in world-wide market
dynamics. Chinese commodity demand that long buoyed prices is now
flagging, and over the past year the Organization of the Petroleum
Exporting Countries has abandoned its traditional role of
stabilizing oil prices, instead feeding a supply glut in
competition with U.S. shale producers.
Other oil producers have also continued heavy pumping, in some
cases to pay down debt or support government spending, even though
it means further driving down oil prices.
After putting off more than $200 billion in oil projects last
year, big energy companies may not ramp up spending when prices
rebound, Bernstein Research said this week.
"Oil company spending will remain capped even if oil prices
rise," Bernstein analysts wrote. The normal link that sees spending
rise with oil prices may be "broken," they said, after big
companies that outspent their cash flow even when oil prices were
triple today's value enter a new period of frugality.
The industry's troubles will put pressure on energy companies to
orchestrate acquisitions and asset sales, said energy consultancy
Wood Mackenzie this week, with private-equity firms in the best
position to take advantage.
"Mounting distress will force more companies to market," said
Luke Parker, the corporate analysis research director at Wood
Mackenzie. "Balance sheets will become ever more stretched without
asset sales to balance the books."
Investors communicated their worries with a broad selloff
Thursday, when plummeting Chinese markets created new uncertainty
over demand for commodities. Royal Dutch Shell PLC closed nearly 3%
lower in London while BHP fell about 5%. The largest American
miner, Freeport McMoRan Inc., was trading 9% lower in the U.S.
The turmoil comes after a withering year for big commodity
producers. The combined market value of the world's five largest
miners--BHP, Rio Tinto PLC, Glencore, Brazil's Vale SA, and Anglo
American--has dropped 52%, or $269 billion, since January of 2015.
The five largest non-state-controlled oil companies, Exxon Mobil
Corp., Shell, BP, Chevron Corp. and Total SA of France, saw their
total market value drop by 20%, or more than $205 billion, over the
same period.
The combination of Chinese turmoil and high oil production in
the U.S. and OPEC members offer little hope of near-term respite.
For oil companies, the expected return of Iranian oil exports when
Western sanctions are lifted early this year could send oil prices
down further.
"You can't say a good thing about the oil price," said Paul
Mumford, a fund manager with Cavendish Asset Management whose funds
hold shares of oil and mining companies. He is also bearish on
small mining companies, many of which may end up with cash-flow
problems if prospects don't improve soon. Already, larger mining
companies have responded to falling prices with layoffs and
temporary closures of projects like a Glencore mine in Zambia.
One key to survival for smaller mining companies, says Ignacio
Salazar, the Chile-based chief executive of small, Toronto-listed
Orosur Mining Inc., is to avoid taking on high-risk debt now that
"the market is not very favorable."
Phoenix-based Freeport-McMoRan, one of the world's biggest
copper miners, is in survival mode, shutting down mines, laying off
workers, and putting its oil and gas division on the block, but
says it has enough confidence in the long-term copper market to
keep running its biggest, lowest-cost mines in places like Peru,
Indonesia and the Democratic Republic of Congo. Activist investor
Carl Icahn, who disclosed an 8.5% stake in August, forced out
longtime chairman James R. Moffett in December, and could push for
even more aggressive changes.
Big oil companies have signaled cutbacks. They have backed out
of big projects like a Shell development in Canada to mine
petroleum from oil sands. The oil industry laid off more than
250,000 workers across the world, analysts say. In December, Shell
lowered its projected spending for 2016 by $2 billion to $33
billion, after making spending and cost cuts of $12 billion last
year.
Some companies have already folded. More than three dozen energy
companies have recently declared bankruptcy, including Swift Energy
Co. The New York Stock Exchange delisted Oklahoma oil-and-gas
outfit Sandridge Energy Co. on Wednesday after its stock closed at
15 cents a share.
Write to Justin Scheck at justin.scheck@wsj.com, Alex MacDonald
at alex.macdonald@wsj.com and John W. Miller at
john.miller@wsj.com
(END) Dow Jones Newswires
January 07, 2016 19:39 ET (00:39 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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