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Who needs oil at $100? Majors making cash at $50: Goldman

BloombergUpdated: Aug 03, 2017, 08.55 AM IST

Integrated giants like BP and Royal Dutch Shell have adapted to lower prices by cutting costs and improving operations, analysts at the bank including Michele Della Vigna said in a research note on Wednesday.

European majors made more cash during the first half of this year, when Brent averaged $52 a barrel, than they did in the first half of 2014 when prices were $109. Back then, high oil prices had caused executives to overreach on projects, leading to delays, cost overruns and in inefficiency, Goldman said.

Those projects are coming online now, producing more revenue, while companies have tightened their belts and divested some assets to reduce debt burdens.

“Simplification, standardisation and deflation are repositioning the oil industry for better profitability and cash generation in the current environment than in 201314 when the oil price was above $100 a barrel,” the analysts said.

In the second quarter, Europe’s big oil companies generated enough cash from operations to cover 91 per cent of their capital expenses and dividends, showing that they’re close to being able to fund shareholder payments with business-generated revenue, according to Goldman.

That will give companies the ability to stop paying dividends by issuing new stock, which has diluted major European energy shares by 3 to 13 per cent since 2014. Next year, dividends from big European energy firms are expected to yield 6 per cent, backed by an estimated 6 per cent free cash flow yield, Goldman said.

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