Royal Dutch Shell Plc  .com Rotating Header Image

Big oil to sharpen focus on costs after $200bn of cuts

Screen Shot 2015-07-23 at 07.42.45

Screen Shot 2015-07-27 at 22.08.30

Screen Shot 2015-07-27 at 08.40.27Europe’s biggest oil companies have to find deeper cuts as oil prices expected to weigh on earnings

By Andrew Critchlow, Commodities editor: 27 July 2015

Three of Europe’s biggest oil companies will report weaker earnings this week and the City is looking for guidance on how to mitigate a sustained slump in Brent crude prices beyond the cost cuts already in motion.

In a market defined by oil prices 60pc lower than they were a year ago, energy giants are running out of options to protect their bottom line and all-important progressive dividends.

The brakes have already been put on 45 oil and gas development projects worth $200bn (£129bn) since prices started to fall towards the end of last year, according to a new report from Edinburgh-based consultancy Wood Mackenzie. Combined, these projects account for around 20bn barrels of reserves. The danger is that international oil companies will reveal this week that even deeper cuts are planned, tipping the industry into a form of atrophy.

BP will start proceedings when they unveil their first set of financials since agreeing a landmark $18.7bn final settlement with the US government for the 2010 Gulf of Mexico oil spill. That settlement will be visible in its second-quarter numbers, which are expected to show around $10bn of additional pre-tax charges on income, bringing its total Macondo-related charges to $53.5bn. Although significant, these charges can easily be absorbed by BP’s still sizeable balance sheet, which shows a current book equity of $111bn.

Like its rivals, the focus for BP will be on where next to make cuts that won’t inhibit its potential to grow production, which is ultimately the best way for oil companies to maintain revenue growth in a falling market. How to achieve this, while remaining cashflow neutral, is the big question now facing chief executive Bob Dudley.

Mr Dudley has arguably completed the most important task he was brought in to do, by stopping the company being broken up in the wake of the Gulf of Mexico disaster. His next task is to future-proof BP against the current weakness in oil prices, which could last for another three years. Mr Dudley has already said that BP would cut expenditure by 20pc this year, while it lays off staff in high-cost operating areas such as the North Sea. It has also frozen pay for the year in a bid to rein in costs, as it focuses on its biggest opportunities, such as Iraq. However, he needs to do more.

Next up with results will be Royal Dutch Shell. The UK’s most valuable listed company and the largest oil major by total production is in a relatively strong position, given its diversified portfolio and well developed natural gas business. At a time when its major rivals are focused resolutely on cutting costs and nothing else, Shell has gone on the front foot and taken big risks.

First came its £47bn proposed takeover of BG Group. If approved by regulators, the deal would swell Shell’s already strong position in the global liquefied natural gas (LNG) market and give it a significant presence in deepwater Brazil. According to RBC Capital Markets, the combined companies would control roughly 16pc of the global LNG market.

Next is the Arctic. Shell is now pressing ahead with a multi-billion-dollar plan to drill in the Chukchi Sea off the Alaskan coast. The controversial scheme could net the British oil major access to a rich reservoir of new oil but it will also come with tremendous risks. Working in this hostile environment will be expensive and any project is unlikely to come in within budget.

The environmental consequences of getting it wrong are also significant. Shell had to call off its last attempt to work in the area after one of its drilling rigs ran aground. The company has already come under fire from environmental campaigners for re-activating its exploration programme and it will be closely scrutinised when its work ramps up.

Shell has outperformed many of its rivals in the current environment but it may have to sharpen its focus further on costs should oil prices continue to linger around $50 per barrel. The company reported a 56pc drop in first-quarter net income at $3.2bn when analyst estimates predicted worse. This performance was mainly due to Shell’s standout downstream unit and its willingness to continue cutting costs. However, like all companies in the sector it will soon start to find it harder to find savings as the oil price slump deepens.

Finally, across the channel French oil major Total will also report its quarterly earnings. Three months ago the company’s chief executive, Patrick Pouyanne, said the company would raise output by 8pc from 2.15m barrels per day of oil equivalent. However, analysts expect that the company will have exceeded this target and be closer to 2.3m bpd in the second quarter.

Total is expected to deliver an adjusted net profit in the second quarter of $2.75bn compared with $3.2bn for the same period a year earlier. However, the market will be looking for further cost-cutting measures and details on how it plans to finance its share of the $27bn Yamal gas project in Russia.

One area that all three oil majors will be expected to make reference to is their intentions in Iran. Following the nuclear agreement that will eventually see the lifting of sanctions, BP, Shell and Total are all expected to aggressively pursue opportunities in the country, which has been closed off to their investment for years. Despite falling oil prices and the pressure to cut costs, new opportunities in Iran cannot be ignored.

SOURCE

This website and sisters royaldutchshellgroup.com, shellnazihistory.com, royaldutchshell.website, johndonovan.website, and shellnews.net, are owned by John Donovan. There is also a Wikipedia segment.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Comment Rules

  • Please show respect to the opinions of others no matter how seemingly far-fetched.
  • Abusive, foul language, and/or divisive comments may be deleted without notice.
  • Each blog member is allowed limited comments, as displayed above the comment box.
  • Comments must be limited to the number of words displayed above the comment box.
  • Please limit one comment after any comment posted per post.