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
come roaring back 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.
The widening gap in plans reflects the different expectations
investors have for the companies, and the companies' separate
business models, as much as their differing views on risk and the
future price of oil. It could have broad implications for global
markets, just as analysts expect crude prices to enter into a new,
more stable era.
Chevron, which reported fourth-quarter profits of $415 million
on Friday, revealed plans to slash spending by about 15% to about
$20 billion. French giant Total SA in December told analysts it
will 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 consultancy Wood
Mackenzie.
A swift return to shale fields could yield enough crude to erase
any benefit of an expected production cut agreed to late last year
by the Organization of the Petroleum Exporting Countries. Rising
costs brought about by a rush to drill would also imperil any
recovery.
The major oil companies' caution comes in part from skepticism
that oil prices will rebound sufficiently, as well as a corporate
structure focused on multibillion-dollar megaprojects that start
and stop slowly, and need stability to resume, analysts said.
The companies, which have deepened their borrowing to pay for
operations and dividends, are also seeking to show investors that
they can reduce debt levels at a price of $50 a barrel. Some
believe the rest of the industry should follow suit.
"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. Big oil share
prices 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 have responded even more positively to shale
companies. Continental Resources Inc., a company focused on
drilling in North Dakota and Oklahoma, has nearly tripled in value
over the past year and plans to boost drilling and increase
spending by about 75% in 2017. A group of similar companies on 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 sees prices rising due to reduced supply
and strong demand. "Our company is extremely well positioned for
this improving price environment."
Investors in big oil companies generally look to them for
stability and steady dividend payments, while they seek out shale
producers for growth. Debt reduction is less of a strategic
imperative for the smaller firms, given those different
expectations.
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, exploration and production
companies will spend $43 billion more than they receive in cash
from operations, according to consulting firm AlixPartners, a cash
flow gap that 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 they don't see prices rising significantly
until vast amounts of crude that is being stored for potentially
higher prices is brought to market.
Other executives, such as Chevron Chief Executive John Watson,
have pushed the company to spend a majority of its funds on
developments that will produce cash flow within two years.
BP Chief Executive 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 leaning more 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 their quarterly
earnings Tuesday.
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.
While Chevron has disclosed plans to ramp up drilling in Texas,
and the other major oil companies continue to develop robust
operations across U.S. shale fields, their predominant focus is in
giant, multibillion-dollar projects. That makes it difficult for
them to boost output and spending quickly.
So their austerity strategy may be driven as much by necessity
than a difference of views on how to respond to slightly higher
prices, analysts said.
"The volume of capital individual producers need to go back into
a shale field is microscopic compared to 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. "They will be less willing to assume the
worst is over and that we're back to better days."
Write to Bradley Olson at bradley.olson@wsj.com and Sarah Kent
at sarah.kent@wsj.com
(END) Dow Jones Newswires
January 29, 2017 07:14 ET (12:14 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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