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Page added on August 4, 2016
What Oil in the $40s Means for Oil Majors
It all seemed to be going so well, but European oil groups have stumbled again.
As the second quarter was closing, it looked as though fears over dividend cuts at the highest yielding of Europe’s big-five energy companies, BP PLC and Royal Dutch Shell PLC, might finally ease.
After all, oil prices had ridden a strong, sustained recovery and investor faith was growing that these companies really were tackling costs and changing their business models to suit cheaper oil.
But now the bumps are back. Second-quarter results were disappointing and the oil price is down about 20% in the past two months.
ENLARGE The results showed that even before prices began to slide, investors and analysts had got a little ahead of themselves, particularly with regard to cash flows.
The five big European groups, BP, Shell, Total SA, Eni SpA and Statoil AS A, began the year on consensus forecasts of $7 billion in total free cash flows for the next four quarters, according to Morgan Stanley analysts. By the end of June, that rolling four-quarter forecast had leapt to $25 billion.
That is far away from how the five companies have been performing. Free cash flows actually have been worsening and recent results took cumulative flows for the past four quarters at the big five down to minus $23 billion, according to Morgan Stanley.
Companies with negative free cash flow can support dividends with higher debt for a while if they think rising commodity prices are going to bail them out, but not forever.
BP and Shell are trading with dividend yields above 7%, while Eni, which cut its dividend last year, is at 6% and Total and Statoil are closer to 5.5%.
There is some good news: BP has reached the end of its big payouts related to the Macondo disaster in the Gulf of Mexico, which has long been a drag. Meanwhile Shell is on course to realize far greater cost savings from its BG Group acquisition than promised. Both will get benefits to their cash flows from these factors.
Despite second-quarter hiccups, analysts are still forecasting a big recovery in cash flows and profits in 2017 and beyond. But these depend on a pickup in oil prices: at UBS for example, forecasts are based on oil at $60 a barrel on average next year, $70 in 2018 and $75 thereafter.
And companies are working to lower breakevens, with BP aiming for a business that works at $50 to $55 a barrel. Brent crude has been below that level for most of the past year.
Nevertheless, payout promises will need to be revised if stuttering global growth and oil back in $40s is a taste of more disappointments to come.
6 Comments on "What Oil in the $40s Means for Oil Majors"
shortonoil on Thu, 4th Aug 2016 11:43 am
“Despite second-quarter hiccups, analysts are still forecasting a big recovery in cash flows and profits in 2017 and beyond. But these depend on a pickup in oil prices: at UBS for example, forecasts are based on oil at $60 a barrel on average next year, $70 in 2018 and $75 thereafter. “
In 2015 there was 2 Gb of the 34 Gb pumped that was replaced. By our calculations the cost to replace the average barrel of reserve is now $71. These companies are now existing on reserves that are all ready in place. As they are pumped down they will become more expensive to extract, not less.
The mantra that prices are going to go back up has been going on for over 2 years. How long do they expect to sell that line? Our affordability curve, which has held for over two years, says that they are not:
http://www.thehillsgroup.org/depletion2_022.htm
The maximum affordable price for petroleum is now about $58. Anything above that level produces enough demand destruction to drive the prices back down. $70 is a pipe dream; now a long distant memory of days of abundant high quality crude.
The industry is now in serious trouble with crashing profits, and losses almost all the way across the board. That is the last thing that the industry want people to know. They will keep pumping out fluff articles, until the real pumps come to a stop.
http://www.thehillsgroup.org/
Apneaman on Thu, 4th Aug 2016 1:14 pm
short, “How long do they expect to sell that line?” & “That is the last thing that the industry want people to know.”
Correct on both counts, but let’s not forget that it also the last thing anyone (99.99%) of the humans wants to hear. Most are incapable of dealing, so it’s magical thinking or head in the sand time. Do not be shocked by this. It is the default behaviour for most humans when faced with an existential crisis. This is NORMAL human behaviour and the evidence for it is irrefutable. After the shit hits you will see the survivors go into action. The humans were naturally selected for this behaviour sometimes know as – “short termism”. There are 7.5 billion of us so obviously it worked to make the humans the most dominant in their short run. Sadly, it’s going to turn out to be one more evolutionary dead end, because as we know, peak oil is not the only deadly crisis the vast majority of humans are ignoring or not addressing. AGW, Ocean acidification, species and ecosystems dying all around us (6th mass) and nuclear powered saber rattling. All existential crises and with the exception of nukes have all wiped out massive amounts of life off this planet numerous times. Now you’ll have to excuse me as I deal with this news by binge watching “Game of Thrones” while filling my brain with chocolate covered high fructose dopamine hits.
It’ll be fine…they’ll think of something……they are just alarmists (that’s what the dead Vesuvians said for 3 days before the eruption)…..I have money, so I’ll be alright, I’m an American, etc, etc……
Are we born to be optimistic, rather than realistic? Tali Sharot shares new research that suggests our brains are wired to look on the bright side — and how that can be both dangerous and beneficial.
https://www.youtube.com/watch?v=B8rmi95pYL0
The optimism bias
Tali Sharot
Department of Cognitive, Perceptual and Brain Sciences, Division of Psychology and Language Sciences, University College London, 26 Bedford Way, London WC1H 0AP, UK
http://www.cell.com/current-biology/abstract/S0960-9822(11)01191-2
Your brain won’t allow you to believe the apocalypse could actually happen
http://io9.gizmodo.com/5848857/your-brain-wont-allow-you-to-believe-the-apocalypse-could-actually-happen
Brent on Thu, 4th Aug 2016 4:06 pm
Short-
I agree with you but I have a couple of questions. One how long do you think that their affordable reserves will last? The second is what happens when the affordable oil is all used up will the oil companies go bankrupt or will the price of oil rise and new drilling start?
Thanks
Davy on Thu, 4th Aug 2016 4:24 pm
Affordable reserves are Evaporating.
The macro collapse dead state of oil is in the vicinity to 2022
shortonoil on Fri, 5th Aug 2016 8:20 am
“I agree with you but I have a couple of questions. One how long do you think that their affordable reserves will last? The second is what happens when the affordable oil is all used up will the oil companies go bankrupt or will the price of oil rise and new drilling start? “
Almost 60% of the world’s production comes from less than 1% of its fields; the Giants. Those fields are getting very old. Ghawar is the perfect example. It is almost 70 years old. It was originally estimated to be a 70 Gb field, and it has already produced 85. Once the Giants are gone there will be no way to replace them. There was an extensive study of the Giants done about 15 years ago. “Giant Oil Fields – The Highway to Oil” by Fredrik Robelius. Robelius concluded that the Giants would go into catastrophic decline by the end of this decade.
Once the Giants go into decline there are no other fields to substitute for them, regardless of the price. In spite of all the talk of Shale, bitumen and etc. they can not replace the 40 mb/d coming from that handful of fields. There is just no way to get that quantity of oil out of those other fields that rapidly. The world’s economy will go into catastrophic decline right along with the Giants.
The Etp Model supports Robelius’s conclusion 100%. It looks at the energy dynamics of the Petroleum Production System. What it is telling us is that the present system of extracting, processing, and distributing petroleum will not be sustainable for much longer. It will soon no longer be able to supply the energy needed to support itself, and also the economy which provides the demand for its production. Like an old clock it is coming to the end of its useful lifespan.
What will bring about the end to age of oil will not be a lack of oil. It will be the ending of the system that produces it, and uses it. That system was constructed on a very small percentage of the total existing liquid hydrocarbons; high quality, low cost conventional crude. When it is gone, so also will be the system that was created from it. That system is the world’s present modern economy!
http://www.thehillsgroup.org/
Kenz300 on Fri, 5th Aug 2016 11:01 am
BP ——- “Beyond Petroleum” —– they once were moving to diversify to wind and solar…..then a change in leadership came in and sold off their investments in wind and solar………..bad mistake…………
All fossil fuel companies need to diversify if they want to survive in some form as “energy” companies……..