By Bradley Olson and Sarah Kent
Big oil companies and smaller U.S. upstarts are plotting sharply
divergent paths as they plan spending for 2017 after a modest
recovery in crude prices.
While shale-oil drillers are boldly raising annual budgets to
revive drilling in Texas, New Mexico and North Dakota,
international oil giants such as Exxon Mobil Corp., Chevron Corp.,
Royal Dutch Shell PLC and BP PLC are planning to hold back
spending, charting a cautious path to recovery.
One reason for tighter purse strings at the bigger companies is
a concern that the recent rebound in oil prices has run out of
steam or could even reverse if members of the Organization of the
Petroleum Exporting Countries fail to follow through on promised
output cuts.
Another threat: Even if OPEC does make good on its pledge, the
smaller firms focusing on U.S. wells could respond by replacing the
barrels the cartel takes off the market, keeping a ceiling on oil
prices over the longer term.
The resilience of some shale-oil producers during the energy
downturn -- and their ability to once again tap capital markets as
oil prices stabilize -- has added complexity to the decision making
at their bigger brethren, which traditionally have been focused on
multibillion-dollar megaprojects that start and stop slowly.
The big firms are catering to the demands of their largely
conservative investor base. That forces the companies to focus on
profits and debt reduction in order to maintain share-price
stability and steady dividend payments.
Investors in shale companies, meanwhile, are focused mainly on
production growth. That gives these companies more flexibility to
return to U.S. oil fields but it leaves the weakest vulnerable when
oil prices drop, as the more than 100 bankruptcies during the past
two years showed.
"The volume of capital individual producers need to go back into
a shale field is microscopic compared with what the biggest oil
companies need for their large-scale projects," said Stephen
Arbogast, director of the Energy Center at the University of North
Carolina-Chapel Hill. "[Big oil companies] will be less willing to
assume the worst is over and that we're back to better days."
Chevron, which reported a fourth-quarter profit of $415 million
on Friday, disclosed plans to slash spending by about 15% to about
$20 billion. French giant Total SA in December told analysts it
would spend between $15 billion and $17 billion this year, a slight
decline from 2016.
In all, spending at major oil companies is expected to decline
by as much as 8% this year, according to consulting firm Wood
Mackenzie.
The companies, which have deepened their borrowing to pay for
operations and dividends, also are seeking to show investors that
they can reduce debt levels with oil prices above $50 a barrel.
Some executives and analysts believe the rest of the industry
should follow suit.
The U.S. crude-oil benchmark contract closed at $53.17 a barrel
Friday.
"Many of the biggest companies are recalibrating to live within
their means," said Gianna Bern, a former trader for BP who teaches
finance at the University of Notre Dame. "The sector became a
victim of its own success, bringing about the crash in crude oil
prices, so the big players want to avoid doing that again."
So far, investors have responded positively. Share prices of big
oil firms are doing better than they have in years. Shell and BP
are both trading near levels not seen since 2014, when oil began to
plummet. Chevron has risen more than 40% from lows hit last
January, and Exxon is up about 15%.
But investors are even more bullish on shale companies.
Continental Resources Inc., a company focused on drilling in North
Dakota and Oklahoma, has nearly tripled in value during the past
year and plans to boost drilling and increase spending by about 75%
in 2017. A group of similar companies in the S&P 500 index is
up 60% in the last 12 months.
"We are entering a new chapter in oil prices," said John Hess,
the chief executive of Hess Corp., which plans to add four rigs in
North Dakota this year and expects prices to rise due to reduced
supply and strong demand. "Our company is extremely well positioned
for this improving price environment."
North American drilling companies have surged as they lay out
plans to add drilling rigs, even though many have yet to show they
can post consistent profits.
In 2017, big and small companies will spend $43 billion more in
their production businesses than they receive in cash from
operations, according to estimates by consulting firm AlixPartners.
That cash-flow gap speaks to continued challenges of successful
operations at today's oil prices.
Overall, U.S. independent producers could increase investment by
more than 25% this year if oil prices remain above $50 a barrel,
according to Wood Mackenzie.
That won't be true at Exxon, Chevron, BP and Shell. Exxon
leaders, including Rex Tillerson, the former chief executive, have
said for months that vast amounts of crude currently held in
storage would have to run down before prices can rise
sustainably.
Chevron CEO John Watson has pushed the company to spend most of
its investments on developments that will produce cash flow within
two years.
BP CEO Bob Dudley has said he is working to ensure his company
can meet expenses and pay dividends with cash from operations at
$50 to $55 a barrel.
"We'll be very selective," Mr. Dudley said in an interview
earlier this month in Davos, Switzerland. "What we don't want to do
is lose the discipline we've built in."
BP has said it expects spending to be between $15 billion and
$17 billion this year, but is leaning toward the lower half of the
range. That is a 30% to 40% drop compared with peak levels in 2013.
Shell is planning to spend $25 billion to $30 billion each year
until the end of the decade, but for 2017 it is likely to be closer
to $25 billion.
Exxon hasn't disclosed specific spending plans for 2017. A
spokesman declined to comment in advance of its quarterly earnings
Tuesday. Spokesmen for BP and Shell also declined to comment.
Lower spending levels have sparked some fears among investors
and oil analysts of supply shortages in coming years, although some
executives have played down that possibility.
Many investors expect the largest oil companies to use any
excess cash to pay down debt levels that swelled after oil prices
fell from more than $100 in 2014 to below $30 a barrel last year.
Such borrowing was one of the reasons ratings firms moved to
downgrade the credit of the companies in 2016.
"The big firms will be judicious in making new investments, as
they may have a different perspective on how OPEC will respond to
the new surge in U.S. activity," said William Arnold, a former
banker and Shell executive who teaches at Rice University.
Write to Sarah Kent at sarah.kent@wsj.com
(END) Dow Jones Newswires
January 29, 2017 20:36 ET (01:36 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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