Oil Profits Slump as Higher Spending Fails to Lift Output

Jan 29, 2014 11:54 am ET

(Adds Shell asset sales in 13th paragraph.)

Jan. 29 (Bloomberg) -- Investors are shunning the world’s biggest oil companies as drilling costs surge, major projects are delayed and energy prices stagnate.

Crude and natural gas producers from Royal Dutch Shell Plc to ConocoPhillips began issuing profit warnings three weeks ago as they tallied the extent of fourth-quarter disappointments. Shareholders have punished the stocks, making the energy sector the worst performer in the MSCI World Index this year, in anticipation of bleak earnings disclosures later this week.

Shell, the second-largest oil company by market value, will report its lowest fourth-quarter profit since 2009 after The Hague-based explorer was socked with cost overruns on some of its most important new fields. BG Group Plc tumbled the most in 25 years on Jan. 27 after slashing its 2014 production target because of turmoil in Egypt and project delays elsewhere.

“Investors have lost interest in the big energy companies,” said Fadel Gheit, an analyst with Oppenheimer & Co. in New York. “They offer little or no growth.”

The bad news may start tomorrow as Shell, Exxon Mobil Corp., ConocoPhillips and Occidental Petroleum Corp. announce fourth-quarter results. Chevron discloses profit the next day, followed by BP Plc and BG next week.

“It’s not going to look pretty across the sector,” said Jason Kenney, an analyst at Banco Santander SA in Edinburgh. “This is a high-spending industry, and the larger projects are sucking in capital. Companies need to convince the market on capital discipline and be more proactive in delivering value.”

Two-Fold Problem

The problem for the oil majors is two-fold: costs are rising and oil prices aren’t, while the complexity of developing the most recent oil and gas discoveries is preventing drillers from reaching production targets. Brent crude prices, the benchmark for more than half the world’s oil, slipped 0.3 percent last year, the first time that prices failed to gain since the global financial crisis in 2008. Prices may slip below $90 a barrel by 2020, future contracts show.

The biggest producers haven’t kept up with gains in oil prices for the past few years. While Brent crude prices have more than doubled to $105 a barrel since the start of 2009, the top five oil and gas companies have gained just 13 percent since then, compared with an 81 percent increase in the Dow Jones Industrial Average.

Gorgon Budget

Chevron said last month the budget for the Gorgon natural gas export complex in Australia rose 4 percent to $54 billion, the second increase in 13 months. The project, which has Exxon and Shell as partners, may have to delay startup by three months because of weather and logistical delays. When Chevron approved the project in 2009, it estimated it would cost $37 billion.

On Jan. 9, the San Ramon, California-based company said that fourth-quarter profit was comparable to the $5 billion earned during the prior three-month period, down from the $7.25 billion posted during the final quarter of 2014. Analysts slashed their per-share earnings estimates in the days that followed and the shares have lost 5.8 percent of their value.

Ben van Beurden, who took the helm at Shell at the start of the year, said Jan. 17, in Shell’s first profit-warning in a decade, that disruptions in Nigeria, weak refining margins and lower U.S. natural gas production brought down earnings.

Brazil Disposal

Shell today announced the sale of a stake in an offshore field in Brazil for $1 billion. The company is targeting $15 billion in asset sales to bring down its net capital investment, or spending on projects adjusted for acquisitions and disposals, which climbed to a record last year.

Shell is seeking buyers for its interest in the Houston-to- Houma crude oil pipeline in the U.S., and may sell fuel-refining and marketing assets in Australia and Norway, and oilfields in Nigeria.

ConocoPhillips said on Jan. 7 that fourth-quarter production slipped to a nine-year low because of bad weather in the U.S. and the North Sea that hampered operations. Daily average output for the Houston-based company fell to the equivalent of 1.475 million barrels.

Beset by shrinking returns and costly project delays, the world’s six largest oil explorers probably will curb spending on exploration and production, or E&P, this year to $148 billion from $149 billion after two consecutive years of 8 percent increases, Cowen and Company analysts including James Crandell said in a Jan. 7 report. Company executives are hoping to ward off a rising wave of shareholder activism by rewarding investors, they said.

‘Greater Scrutiny’

“It appears as if the supermajors are giving greater scrutiny to major E&P projects relative to returns,” the Cowen analysts wrote. “This is due to the rise in shareholder activism which could push these companies to distribute more of their large cash flows to shareholders via share repurchases and dividends.”

Still, there are limits to how much oil companies can cut spending if they want to maintain output over the next few years, said Christine Tiscareno, an equity analyst at S&P Capital IQ in London.

“Investors are getting angry and don’t want oil companies to invest,” Tiscareno said. “But if they don’t invest, they won’t be able to pay dividends in the future.”

--Editors: Will Kennedy, Susan Warren