Big Oil Won’t Spend Despite Fat Profits

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By Nick Cunningham

Higher oil prices are expected to leave the oil industry flush with cash, but the “capital discipline” mantra remains. Market watchers have wondered whether top oil executives would eschew with tight-fisted spending plans once their pockets fattened up again.

“We’re laser focused on disciplined free cash flow generation and strong execution. Discipline means, we’re not chasing higher prices by ramping up activity,” ConocoPhillips’ CEO Ryan Lance told investors on an earnings call. “By staying disciplined, we generate strong free cash flow, which we then allocate in a shareholder-friendly way.” He went on to stress how committed the company was to boosting the quarterly dividend and share buyback program.

Conoco beat analysts’ estimates, earning $1.36 per share in the third quarter, eight times the earnings from the $0.16 per share a year earlier. Conoco also saw soaring production in the big three shale areas – the Permian, Eagle Ford and Bakken – with output up 48 percent to 313,000 bpd. Lance said that the company still wants to “optimize” its portfolio, which includes $600 million in asset sales.

Conoco’s experience highlights an important industry trend, which is prioritizing profits over growth and size. Lance pointed out that the last time earnings were this good was back in 2014. “Brent was over $100 per barrel and our production was almost 1.5 million barrels of equivalent oil per day. So we’re as profitable today as we were then, despite prices being 25% lower and volumes being 20% lower,” Lance told investors. “So bigger isn’t always better. That’s why we’re focused on per share growth and value, not absolute volume growth.”

Norwegian oil company Equinor (formerly Statoil) echoed that sentiment. After laying out the company’s earnings, CFO Lars Christian said “you have to go all the way back to first quarter 2014 to find strong results, and then remember the oil price level above $100.” But again, that doesn’t seem to have triggered a new aggressive approach. “With the E&P industry seeing higher oil and gas prices, now is the time we must show discipline and protect the structural improvements we have achieved over the last four years,” Christian told investors on an earnings call. Equinor, despite the improved performance, announced that it was lowering its capex guidance by $1 billion for the year.

The same words of “capital discipline” along with a focus on “capital distribution” – i.e. payouts to shareholders – are evident in just about every earnings call. This is what investors are demanding, not a return to reckless spending on megaprojects in far flung places.

However, modest spending also flies in the face of what some analysts are asking for in the long-term. A September report from Wood Mackenzie said that the oil industry’s spending restraint could sow the seeds of a supply crunch in the 2020s. “The warning signs are there – the industry isn’t finding enough oil,” WoodMac said in its report.

The oil consultancy said that by the mid-2020s, a supply gap emerges, rising to 3 million barrels per day by 2030. By 2035, the supply gap jumps to as much as 7 mb/d. “Barring technology breakthrough beyond what we already assume, we’ll need new oil discoveries,” WoodMac concluded.

The IEA has repeatedly warned of a similar problem. The sharp downturn in spending following the market bust in 2014 has barely recovered. But, as the earnings reports indicate, Big Oil is now back to making money in a big way, even with spending at a fraction of pre-2014 levels.

However, profitability is not the same thing as the global oil industry having enough supply to meet demand. WoodMac and the IEA, among others, are concerned that the capital discipline mantra will lead to a supply disaster in the middle of the next decade.

The oil majors are not concerned about that right now. Investors are happy that the quarterly figures are strong again.

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