Big Oil Is Better Prepared For The Next Price Crash

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By Tsvetana Paraskova

The six largest international oil companies have shored up profits and cash flows this year, reporting incomes at their highest levels since the 2014 oil price crash. Cost cuts, conservative price assumptions in spending plans, and investment cherry-picking has paid off.

Now the six biggest of Big Oil—Exxon, Chevron, Shell, BP, Total, and Eni–are in a good place to remain resilient at $60 a barrel Brent Crude, thanks to diversified and robust portfolios, according to ratings agency S&P Global Ratings.

Even when oil prices hit four-year highs in October, the largest publicly traded international oil companies didn’t change their underlying price assumptions for future investment in projects—they continue to conservatively plan for a world of oil prices at $50 to $60.

“Supermajors and these guys, the big players, the IOCs, they reckon they can break even with Brent at $50 (per barrel),” Simon Redmond, senior director of corporate ratings at S&P Global Ratings, told CNBC this week.

“So, whether its $65 or $60, they’re looking pretty good. And they should be able to generate meaningful cash flow,” Redmond said, singling out Exxon and Shell as the two majors with the strongest profiles.

In October, when Brent Crude hit $86 a barrel, oil majors didn’t get carried away like some analysts who started talking about a return of $100 oil.

Big Oil reaffirmed that their base-case project planning scenarios continue to be in the $55-65 range and that they can break even at around $50 Brent Crude price or even below.

“As oil prices stay up over $50 a barrel, we will be surplus free cash as we go into 2020, and 2021. And, of course, we have said our breakeven goes down to $35-40 a barrel by the end of 2021, unless we chose to distribute to shareholders,” BP’s CFO Brian Gilvary said on the Q3 earnings webcast.

Answering an analyst question at what oil price BP is basing its plans, Gilvary said that this year the company set that at $55 a barrel.

“We run those cases at $50 and $75 a barrel. And at $75 a barrel real over a very long period of time, and $50 is the base case that we run everything at. That’s how we look at our projects,” Gilvary noted.

Total said in its strategy presentation in September that it had more than halved its post-dividend breakeven to $50 a barrel now, compared to 2014.

Shell is aiming for its projects to be able to break even at $40 oil, CFO Jessica Uhl said at the Q3 earnings call.

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Eni has halved its cash neutrality point—the point at which it will be able to fund capex and dividend—from $114 a barrel in 2014 to $57 a barrel. In the Q3 earnings release, Eni confirmed its cash neutrality for 2018 is at $55 per barrel oil.

Big Oil’s project and profitability estimates may be put to the real test next year, as oil prices slumped by around 30 percent from early October highs, with Brent currently sitting just above $60.

OPEC and allies’ deal to curtail production again may have put a soft floor under oil prices, but it has definitely failed to impress the market. Analysts have recently slashed projections for oil prices for 2019.

Earlier this week, Morgan Stanley lowered its Brent Crude price forecast for 2019 by US$10 a barrel to US$68.50.

S&P Global Ratings sees Brent at $65 next year and at $55 in the longer term, and expects WTI at $60 in 2019.

In its December Short-Term Energy Outlook (STEO), the EIA slashed its 2019 price forecasts for Brent and WTI to $61 and $54, respectively—both $11 a barrel lower than forecast in the November STEO.

“EIA expects that the magnitude of the recent price declines combined with the OPEC production cuts will bring 2019 supply and demand numbers largely into balance, which EIA forecasts will keep prices near current levels in the coming months,” it said.

Market volatility in November was the largest since 2012 for Brent and the largest since 2014 for WTI. The implied volatility more than doubled in November in a sign of the growing uncertainty in the market about future supply and demand, according to the EIA.

Amid uncertainties and market volatility, oil majors expect to continue churning in profits even at $50 Brent. We may see their resilience tested next year.

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