Dozens, even hundreds of E&Ps and service providers in the oil and gas industry have recently announced intentions to dial back expenditures in 2015. Supermajors like Shell (NYSE: RDSB) and ExxonMobil (NYSE: XOM), on the other hand, both pledged to reduce expenditures in analyst days in the spring of this year, when WTI and Brent prices were resting comfortably in the $90 to $105 range.
The shift in the oil market will obviously not change the course of direction for any supermajor energy companies. Rather, the focus will just have to become more centralized than before. Chevron (NYSE: CVX) is one of the few who has not publicly announced changes to its budget. The company announced it plans on spending approximately $40 billion per year through 2017 in its analyst day back in March 2014. XOM, on the other hand, plans on dialing back spending to $37 billion per year for the same period.
Pavel Molchanov of Raymond James and Associates does not believe CVX will maintain its 2015 guidance at current oil levels, according to a note published following a meeting with Chevron management. Although Molchanov doesn’t expect CVX to take the “slash and burn” approach followed by smaller operators, he does believe in a “modest cut” of 5% to 7%. The cut would shave approximately $2 billion off of next year’s expenditures, which is approximately the same curtailed amount by XOM. CVX’s announcement may not come until January as management decides its new planning process in the revamped oil market.
What Misses the Cut?
Long term, capital intensive projects will still receive their cut of funds. That specifically includes LNG projects. Molchanov explains in his note, that “With this in mind, all long lead time projects that are currently in construction will be taken to fruition, because mothballing a half-built LNG would be just about the worst waste of money there is.“
Segments most likely to see a pullback in funds are short cycle, or “base business” drilling, says Molchanov. Wildcat drilling will most likely be nearly eliminated from plans for the time being, as the majority of companies will focus even more directly on projects with the highest rate of return.
“That being said, Kitimat LNG and a fourth train at Gorgon LNG are examples of projects that would not be viable in a $70/Bbl oil environment,” says Molchanov.
Course of Action for CVX
The Raymond James note stressed the importance of CVX meeting its dividend and says either a reduced capital plan or possible divestures will be needed to meet the expectations. The company could also temporarily postpone its stock buyback program – an event that would be explained no later than year-end 2014.
Molchanov explains: “When we run sensitivities more in line with spot pricing ($75 Brent, $70 WTI), not a single company in the mega-cap peer group would generate sufficient free cash flow (after capital spending) to fully cover the dividend payout. For Chevron, that bleak scenario would imply a borrowing requirement of $6 billion (assuming a 5% spending cut), plus another $8 billion for the dividend. That being said, Chevron is totally committed to the dividend, and we cannot envision any plausible scenario under which it would be cut, even temporarily. (It’s worth remembering that no company in the peer group cut dividends even during the 2008-2009 meltdown).
Supermajors Reassure the Markets
Many of the oil giants have said operations are still profitable at the current oil prices. E&Ps like Encana (NYSE: ECA) and Continental Resources (NYSE: CLR) are actually planning on boosting production in 2015. Harold Hamm, Chief Executive Officer of Continental, has become a figurehead in the oil price war. Hamm’s company eliminated all hedges and called the swoon “unsustainable” in a major statement against OPEC’s actions.
Rex Tillerson, Chief Executive Officer of ExxonMobil, said the company tests oil prices as low as $40 when running its pricing models. He said: “These are decade long investments decisions. All of the decisions we make have been tested across a wide range that accommodate these price swings. You need to make sure you’re successful at the bottom of the cycle.”
He also assured investors that XOM’s operations in the U.S. are here to stay. “We are a big investor of shale in the United States, and we’re quite happy with how it’s performing,” he said. “You have to be in the big resources bases around the world, and we’re in the middle of one in North America.”
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