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. 

Solar energy industry and engineering is becoming a breakthrough

Solar energy is becoming profitable

JEAN PIERRE FARANDOU / KEOLIS CEO | DEC. 12th

A photovoltaic power plant in Dubai - courtezy enerzine

A Dubai solar field is considering to sell its power generation for € 48 per MWh.
In many countries, this energy is no more subsidized.

The revolution of solar energy is on. Friday, Acwa Power, a Saudi company, won a tender in Dubaï, as it offered a 48€ rate per MWh for a photovoltaic solar field. The steadily decrease of solar power production cost carries on.  In many countries, such as Chile, South Africa or India, this energy is becoming less expensive than traditional ones: coal, gas or nuclear…”Even in France, the gap has been divided by three since several years”,  said Gérard Mestrallet, GDF Suez CEO. But France is quite an exceptional case because of its particularly low price of historic nuclear power generation: the market price amounts to € 40 per MWh.

No risk in the long term

Why is there a so dramatic reduction of costs? “Three factors must be taken into account”, explains Thierry Lepercq, Solairedirect CEO (a French SME). “First, we face a steadily increase of photovoltaic cells yield, which may increase by 20% more in the next decade. Then, since 2008, the costs of modules producing solar energy have dropped by six. Finally, financial costs have been reduced by two, as investors consider that the risk rate of the sector is relatively low in the long term.”

In some countries, solar energy is no more subsidized. Gérard Mestrallet says: “when its costs will reach the market levels, many public and private actors will swing over to this energy generation, which will be at the core of the energetic transition”. France has still a lot to do. Whereas our Italian neighbor produces 10% of its power demand from solar energy, this one only supplies 1% of the French power generation. That’s why the general public has got an image of a secondary energy, used only to plug some information panels or to warm pools.

Nevertheless, French groups are reconsidering their position. In 2011, Total bought back Sunpower, an American leader of the sector. Patrick Pouyanné, Total CEO, confirms the strategic aspect of this activity for the French oil group : “We have invested € 2 billion in solar sector. We consider that this sector will develop, as this activity has become profitable in some twenty countries, compared with other power sources.”

How high may the evolution of solar sector be? The GlobalData cabinet expects that the installed power will grow by three by 2020, to amount to 414 gigawatts. “Solar market share may amount to 20%. Beyond this limit, the problem of its sporadic feature, such as night, will arise”, Thierry Lepercq says.

The next challenge to be faced by the sector shall consist in storing the produced power. Moreover people will need to change their habits, such as consuming power when the sun shines!

Jean-Pierre Farandou, Les Echos