MAJORS CUTS $28 BLN
The world's biggest energy companies are preparing to cut tens of billions of dollars from capital spending as they set out plans this week to respond to the drastic slide in oil prices.
Investment in the exploration and development of oil and gasfields could fall by 20 per cent, or $28bn, by 2017 from last year, according to analysts at Morgan Stanley, as the industry acts to protect dividend payouts as its cash flows are squeezed.
The gloomy forecast comes as some of the largest private sector oil groups are due to report steep falls in earnings, with only Royal Dutch Shell announcing an increase, and that only because its performance was so poor a year ago that it issued a profit warning.
The effects of the collapse will be more acute for smaller, independent producers. Across the industry, and including nationally owned groups, Wood Mackenzie estimates companies will need to cut overall costs by $170bn, or 37 per cent, to maintain net debt at last year's levels, assuming a price of $60 a barrel for internationally traded Brent crude.
At less than $50 a barrel, Brent is now 50 per cent below the 2014 average of $99.
"Lower oil prices pose the biggest threat to oil and gas industry earnings and financial solidity since the financial crash of 2008," warned Wood Mackenzie analysts.
Shares in the six largest US and European groups by market capitalisation — ExxonMobil, Chevron, Shell, Total, BP and ConocoPhillips — have dropped between 4 and 24 per cent since crude plunged from its mid-June highs of over $115 a barrel.
They are expected to report falls of 19 per cent to 57 per cent in their fourth-quarter earnings
Iain Reid at BMO Capital Markets said that fourth-quarter earnings for a wider group including Italy's Eni, Petrobras of Brazil and Russia's Rosneft, would be "severely impacted" by oil's slide, falling 39 per cent from the previous year.
More job losses could also be announced after BP and ConocoPhillips said they would cut hundreds of roles in their North Sea arms.
Analysts do not yet expect dividend cuts. BP chief executive Bob Dudley said last week that preserving the payout was its "rock solid intention".
But investors will want to see evidence that cost-cutting programmes already under way are being accelerated. "The market will likely focus on how quickly 'Big Oil' can adapt to the new environment and the steps they take towards withstanding a scenario of prolonged weakness in commodity prices," said Morgan Stanley's Martijn Rats.
Citigroup's Alastair Syme warned that as companies adjusted to lower long-run prices, they might write down the value of troubled projects such as Kashagan in Kazakhstan, the cost of which is set to rise by nearly $4bn as the consortium developing it is forced to replace leaking pipelines.
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