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Despite cuts to jobs, spending, oil giants fail to cover costs

  • The Australian
  • 12:00AM April 4, 2017

The world’s biggest oil companies are struggling just to break even.

Despite billions of dollars in spending cuts and a modest oil price rebound, ExxonMobil, Royal Dutch Shell, Chevron and BP didn’t make enough money last year to cover costs, according to a Wall Street Journal analysis.

To calculate each companies’ free cash flow — the excess cash remaining after costs — the Journal deducted the firm’s dividends and capital expenditures from its cash from operations. All four firms fell short of cash flow for the year, although Exxon said it broke even by its own metrics, which exclude dividends. The analysis also showed that the four companies ended last year with more debt than they began it.

The firms are showing signs of improvement. Shell and Exxon notched stronger quarters late last year. However, analysts point to challenges ahead as oil prices hover around $US50 a barrel.

BP says it will need oil at $US60 a barrel to balance cash generation against capital expenditures and dividends and Chevron is targeting $US50 a barrel with the help of asset sales.

Investment bank Jefferies estimates neither Shell nor Exxon ­require more than $US50 a barrel, though those companies don’t disclose break even prices.

For companies once known as profit machines,— whose executives were hauled before Congress in 2005 to explain their enormous earnings — the cash problems demonstrate just how unprepared they were for a historic crash and tepid recovery in oil prices. They have maintained the same large dividends they had when oil prices were at more than $US100 a barrel, piling on debt and selling off assets to prioritise shareholders above all else.

The result is that spending on dividends and capital investments has ballooned above cash generated from their businesses. The issue has worried investors who expect those steady dividends because oil giants don’t have the ­capacity to grow much. Exxon, Shell and their competitors are under pressure to show they can drum up cash to keep shelling out dividends.

“Since the oil price collapsed, it’s been all about who’s fastest down the road to breaking even,” said Iain Reid, a senior analyst at Macquarie Capital. “In the short term, it’s all about cash flow ­because people are still worried about the dividend.”

Exxon, Shell and their peers spent much of the past three years scrambling to reassure investors that their dividends were safe amid the oil price crash. These companies were already struggling to live within their means at elevated oil prices.

In response to the tumble in prices, the companies laid off thousands of workers, slashed billions in spending and piled on debt to protect the payouts. Despite disappointing profits last year, they say that medicine is now working.

Exxon and Shell managed to break even in the final quarter last year. In the fourth quarter, Exxon generated $US400 million more than it spent and Shell made $US1.2 billion over its outlays, ­according to the Journal’s analysis. But for the full year, Exxon spent nearly $US7bn more on developing new projects and dividends in 2016 than it made in cash.

Shell’s costs last year were about $US11bn above cash generation, the Journal analysis shows.

“We are right in the middle of transforming the company,” Shell chief executive Ben van Beurden told the CERAWeek conference in Houston last month.

“We are going to be able to produce a free cash flow that is going to be more than twice as high as it was in the $US90 era, but this time in a $US60 world.”

In a sign investors remain fixated on companies’ cash flow position, BP’s share price tumbled about 4 per cent when the company upgraded its break even oil price to $US60 a barrel in February. International benchmark Brent crude hasn’t hit that level since the middle of 2015.

“The ultimate goal of the company is to generate excess free cash flow,” BP chief executive Bob Dudley said in an interview last month. The company has seven new projects starting up this year and nine more under way that will add 800,000 barrels a day of new production by the end of the decade, pushing up returns.

BP expects to drive its break-even price back down towards $US55 a barrel by the end of the year from about $US60 now.

“The message going forward is good,” Chevron chief executive John Watson said in January. “Four years ago, I wouldn’t have thought that would be the case at moderate prices.”

But all of the companies’ ability to break even relies on forces outside their control, especially oil prices. “This is the year when their credibility will be tested,” said Jefferies analyst Jason Gammel, referring to big oil companies. “Some are more capable than ­others.”


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