Oil majors reduce their investments while maintaining their dividends

Oil Majors reduce their investments

Oil: majors’ leverage tips to put up with the crisis

ANNE FEITZ / JOURNALIST – ON FEB. 4TH "les Échos"

Investment reduction of oil majors

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Oil: majors’ leverage tips to put up with the crisis

The oil companies have announced some investment reductions from 10 to 15%. Yet they will save their dividends.

The oil majors have unveiled their strategies to adapt to barrel plummeting price. As the brent has lost more than 50% within a six months’ time, every company has announced cuts in their investments, when presenting their financial statements. To date, such savings will amount to USD billions in 2015 to begin with, representing a cut of 10 to 15%.

Yesterday BP published its financial statements and investments will be reduced from USD24-26 billion as expected, to reach USD20 billion. Before BP, Royal Dutch Shell, Chevron and ConocoPhillips announced a cut of USD5 billion over the year, compared with 2014. France’s Total has not yet published its statements, but Patrick Pouyanné, Total managing director, already indicated that investments will be cut to amount to USD23-24 billion, compared with USD 25-26 billion as expected formerly.

Cost reduction strategies

The only one to escape this rule is ExxonMobil: on March, 4^th, the American behemoth will precise its strategy during its investors’ day, but the managing team has already indicated that they don’t intend to set up major changes this year. The group already announced a cut in order to reach  USD37 billion in 2015, to be compared with USD 38,5 billion in 2014 and USD42,5 billion in 2013.

“Last year, majors started to cut their investments, as they invested hugely and already supported a significant increase of costs”, said Sandrine Cauvin, manager of Turgot AM. “Brent price drop leads them to emphasize this trend.” Together with investment reduction, there will be cost reductions plans, which means an increased pressure on suppliers but also means efforts from the staff. Some majors have already announced staff reductions, as Shell or BP. Total has targeted a €1,2 billion of savings instead of the budgeted €800 million and has already announced a job freeze.

Cancellation of high-scale projects

Where will the cuts be done? Without any surprise, the projects submitted to postponement or cancellation are the most difficult projects located in areas facing high production costs. Shell will reduce its presence in Canadian bituminous sands, where Total will stop two major projects too. Chevron will slow down its activities in shale in the United States, to focus on more attractive locations, like Texas Permian basin. The American company has also suspended a drill in Canadian Arctic and its shale gas projects in Poland. There are other locations, like North Sea or very deep off-shore, which shall be affected by these activity reductions. “Yet majors’ flexibility remains limited as operated projects represent some 75 to 80% of their investment costs”, wrote an analyst.

Nevertheless, dividends shall be saved and they represent several billions USD yearly. “Dividends are quite sacred by Shell, I will do all what I can to save it”, explained Ben Van Beurden, Shell CEO. Total, ExxonMobil or Chevron follow this reasoning too.

Anglo-Saxon companies intend to reduce their share redemption programmes yet. Chevron, which redistributed USD5 billion through share redemption in 2014, even announced that the company renounced to such redemption in 2015. And, if the exchange value of the dollar remains low, they will face an increase of their indebtedness. As their indebtedness rate amounts to 9% (ExxonMobil) to 28% (Total), they benefit from a financial relative flexibility. “ Their indebtedness rate may reach 40, even 50%”, Sandrine Cauvin says. Thanks to the cash reserves accumulated during lucky years, majors may stand the shock of a very low price without too much damage.