By Bradley Olson and Sarah Kent 

Big oil companies and smaller U.S. upstarts are plotting sharply divergent paths as they plan spending for 2017 after a modest recovery in crude prices.

While shale-oil drillers are boldly raising annual budgets to revive drilling in Texas, New Mexico and North Dakota, international oil giants such as Exxon Mobil Corp., Chevron Corp., Royal Dutch Shell PLC and BP PLC are planning to hold back spending, charting a cautious path to recovery.

One reason for tighter purse strings at the bigger companies is a concern that the recent rebound in oil prices has run out of steam or could even reverse if members of the Organization of the Petroleum Exporting Countries fail to follow through on promised output cuts.

Another threat: Even if OPEC does make good on its pledge, the smaller firms focusing on U.S. wells could respond by replacing the barrels the cartel takes off the market, keeping a ceiling on oil prices over the longer term.

The resilience of some shale-oil producers during the energy downturn -- and their ability to once again tap capital markets as oil prices stabilize -- has added complexity to the decision making at their bigger brethren, which traditionally have been focused on multibillion-dollar megaprojects that start and stop slowly.

The big firms are catering to the demands of their largely conservative investor base. That forces the companies to focus on profits and debt reduction in order to maintain share-price stability and steady dividend payments.

Investors in shale companies, meanwhile, are focused mainly on production growth. That gives these companies more flexibility to return to U.S. oil fields but it leaves the weakest vulnerable when oil prices drop, as the more than 100 bankruptcies during the past two years showed.

"The volume of capital individual producers need to go back into a shale field is microscopic compared with what the biggest oil companies need for their large-scale projects," said Stephen Arbogast, director of the Energy Center at the University of North Carolina-Chapel Hill. "[Big oil companies] will be less willing to assume the worst is over and that we're back to better days."

Chevron, which reported a fourth-quarter profit of $415 million on Friday, disclosed plans to slash spending by about 15% to about $20 billion. French giant Total SA in December told analysts it would spend between $15 billion and $17 billion this year, a slight decline from 2016.

In all, spending at major oil companies is expected to decline by as much as 8% this year, according to consulting firm Wood Mackenzie.

The companies, which have deepened their borrowing to pay for operations and dividends, also are seeking to show investors that they can reduce debt levels with oil prices above $50 a barrel. Some executives and analysts believe the rest of the industry should follow suit.

The U.S. crude-oil benchmark contract closed at $53.17 a barrel Friday.

"Many of the biggest companies are recalibrating to live within their means," said Gianna Bern, a former trader for BP who teaches finance at the University of Notre Dame. "The sector became a victim of its own success, bringing about the crash in crude oil prices, so the big players want to avoid doing that again."

So far, investors have responded positively. Share prices of big oil firms are doing better than they have in years. Shell and BP are both trading near levels not seen since 2014, when oil began to plummet. Chevron has risen more than 40% from lows hit last January, and Exxon is up about 15%.

But investors are even more bullish on shale companies. Continental Resources Inc., a company focused on drilling in North Dakota and Oklahoma, has nearly tripled in value during the past year and plans to boost drilling and increase spending by about 75% in 2017. A group of similar companies in the S&P 500 index is up 60% in the last 12 months.

"We are entering a new chapter in oil prices," said John Hess, the chief executive of Hess Corp., which plans to add four rigs in North Dakota this year and expects prices to rise due to reduced supply and strong demand. "Our company is extremely well positioned for this improving price environment."

North American drilling companies have surged as they lay out plans to add drilling rigs, even though many have yet to show they can post consistent profits.

In 2017, big and small companies will spend $43 billion more in their production businesses than they receive in cash from operations, according to estimates by consulting firm AlixPartners. That cash-flow gap speaks to continued challenges of successful operations at today's oil prices.

Overall, U.S. independent producers could increase investment by more than 25% this year if oil prices remain above $50 a barrel, according to Wood Mackenzie.

That won't be true at Exxon, Chevron, BP and Shell. Exxon leaders, including Rex Tillerson, the former chief executive, have said for months that vast amounts of crude currently held in storage would have to run down before prices can rise sustainably.

Chevron CEO John Watson has pushed the company to spend most of its investments on developments that will produce cash flow within two years.

BP CEO Bob Dudley has said he is working to ensure his company can meet expenses and pay dividends with cash from operations at $50 to $55 a barrel.

"We'll be very selective," Mr. Dudley said in an interview earlier this month in Davos, Switzerland. "What we don't want to do is lose the discipline we've built in."

BP has said it expects spending to be between $15 billion and $17 billion this year, but is leaning toward the lower half of the range. That is a 30% to 40% drop compared with peak levels in 2013. Shell is planning to spend $25 billion to $30 billion each year until the end of the decade, but for 2017 it is likely to be closer to $25 billion.

Exxon hasn't disclosed specific spending plans for 2017. A spokesman declined to comment in advance of its quarterly earnings Tuesday. Spokesmen for BP and Shell also declined to comment.

Lower spending levels have sparked some fears among investors and oil analysts of supply shortages in coming years, although some executives have played down that possibility.

Many investors expect the largest oil companies to use any excess cash to pay down debt levels that swelled after oil prices fell from more than $100 in 2014 to below $30 a barrel last year. Such borrowing was one of the reasons ratings firms moved to downgrade the credit of the companies in 2016.

"The big firms will be judicious in making new investments, as they may have a different perspective on how OPEC will respond to the new surge in U.S. activity," said William Arnold, a former banker and Shell executive who teaches at Rice University.

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

 

(END) Dow Jones Newswires

January 29, 2017 20:36 ET (01:36 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.
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