Majors React to New Normal | Russell T. Rudy Energy LLC
A recent article in “World Oil” cites a study of international major oil company results in the third quarter of 2015. The study, conducted by consultants, Wood Mackenzie, identified four themes with implications for 2016. These included weak financial performance, strong production, deep cost cutting, and stringent capital allocation, as companies adjust to the assumption that prices will be “lower for longer”.
Third quarter earnings for international majors were down sharply for the fourth straight quarter. The 50% oil price drop has led to over $9 billion of asset write-downs and impairments. This was offset somewhat by strong refining profits, reinforcing the benefits of vertical integration.
Production volumes surged as a result of previous investments. Total led the pack with double digit production rate increases. Eni, Statoil and Shell had strong quarters in terms of production volumes as well. However, rates are expected to eventually fall as a result of cancelled, deferred and reduced investments as companies concentrate on profit rather than volume.
Even more cost cutting is underway. The majors are looking to maintain or grow dividends through organically generated cash flow. In order to do this, companies are expected to reduce capital outlays by 30% through 2017.
More stringent investment criteria for the limited capital available seems to be the norm. BP, which is considered typical in this regard, is assuming $60 oil and using a mid-teens hurdle rate for evaluating all future projects.
To read the article in its entirety, please go to http://www.worldoil.com/news/2015/11/03/wood-mac-identifies-key-themes-for-the-majors-in-2016 .
