The final quarter of 2014 was bad enough. British giant BP PLC announced its biggest quarterly loss since the Deepwater Horizon spill in the Gulf of Mexico in 2010. Exxon Mobil Corporation’s cash flow fell to its lowest level since the midst of the financial crisis in 2009.
The year-end carnage was for a three-month period in which a barrel of oil traded at $77. In the latest quarter, the Brent international oil benchmark averaged $55.13 a barrel.
“It’s going to be ugly,” said Jason Gammel, an analyst at Jefferies. “It’s going to be a really bad quarter.”
Most of the world’s biggest oil companies have already slashed spending, with many of them cutting jobs. Underscoring the severity of the oil-price pressure, they have also turned to investors to help them preserve cash.
Eni SpA of Italy cut its dividend in March, a dramatic move within a group of companies that holds as almost sacred the ability to maintain steady payments to shareholders.
Royal Dutch Shell PLC and French giant Total SA recently said they would offer investors the option to receive their dividend in shares, a move that could bolster the companies’ cash holdings.
In February, Exxon said to cut costs it would reduce first-quarter spending on share buybacks by two-thirds from the preceding quarter to $1 billion. Chevron Corporation has suspended its buyback program altogether.
After a quarter of even lower oil prices, Big Oil is likely to continue to impose measures of austerity and negotiate better deals with contractors. Consultancy Wood Mackenzie estimates that by next year exploration costs will be driven down by about a third compared with 2014.
Companies are also working to cut operating costs, said Andrew Mackenzie, chief executive of BHP Billiton Limited, the Anglo-Australian mining giant that also has a sizable oil-and-gas arm.
“It’s going to be tightening the supply chain and sharing the pain,” Mr Mackenzie said in a recent interview.
Some cost cutting may show up when oil companies start reporting results later this month, providing some relief. BP and Shell are among the first big companies to report first-quarter earnings, on April 28 and April 30, respectively.
“I think you’ll find that when BP and Shell report results there will be quite a sharp revenue drop, but costs will have also fallen,” said Paul Mumford, a senior fund manager at Cavendish Asset management, which holds small stakes in both companies.
BP, Shell and Exxon referred questions to previous statements about how they are managing the weaker price environment. Chevron also noted previously announced plans to cut costs, reduce spending and pursue assets sales, while adding that it remains confident of its long-term business plans and its ability to manage the downturn.
Spending cuts are a Catch-22 for oil companies caught in a relentless race to replace the oil reserves they draw down every year. Reduce exploration spending too much, and companies run the risk of failing to line up new supplies to bolster their oil reserves, a closely watched metric for energy investors. And if they cut development costs too deeply, production suffers, affecting cash flow.
The pressure is acute. Chevron Chairman and Chief Executive John Watson told analysts in March that the company’s negative returns for shareholders in 2014 were ‘unacceptable’ and outlined ‘significant cost-reduction programs underway’. The company is rebidding contracts and negotiating reductions with suppliers, even as it works toward production growth of 20 percent by 2017.
To meet their substantial costs amid the price drop and fall in cash flow, companies have been piling on debt in recent months. According to Morgan Stanley, large integrated oil companies led by Exxon, Total, Chevron and BP raised $31 billion in debt in the first two months of the year, beating the previous quarterly record of $28 billion amassed at the height of the financial crisis in early 2009.
Loading up on debt is not necessarily a problem in the short term. Big integrated oil companies generate billions of dollars in cash each year and have substantial refining and trading arms that provide some cover in a low-price environment.
They have strong balance sheets and can take advantage of low borrowing costs. Morgan Stanley suggests that the enormous amount of debt Exxon, Chevron and others have taken on could signal that the oil majors have one eye on funding possible acquisitions.
With many in the industry expecting crude prices to start recovering in the second half of the year, some analysts are suggesting prices—and oil companies’ earnings—may have hit a floor in the just-ended quarter.
“The first quarter is going to be, I hope, the bottom of earnings for many years to come,” said Fadel Gheit, analyst at Oppenheimer.
