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Analysis: Oil majors hold fire on spending spree despite cash flow boom


Majors stick to capital discipline

Shale rebound supports output growth

Signs of cost inflation appear

  • Author
  • Robert Perkins
  • Editor
  • E Shailaja Nair
  • Commodity
  • Oil

London — Most Western oil majors were able to lift production volumes in the third quarter, which saw higher oil prices flood balance sheets with cash and raise confidence over a new wave of upstream spending.

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During the quarter, oil majors wowed investors with sharply higher earnings and flagged stronger free cash flow generation as hard-earned efficiency gains and cost deflation continued to pay off.

But signs of any near-term return to plowing excess cash into new upstream projects have yet to materialize.

Upstream volume growth was mixed across the oil majors during the quarter with standouts Chevron and Total leading the pack.

Chevron increased its US Permian shale basin production by 150,000 boe/d in the quarter, or 80% year on year, taking total volumes up 9% on the year. The US major also benefited from the startup of the Gorgon and Wheatstone LNG projects in Australia.

Total also saw its oil and gas production grow a sector-leading 9% year on year, fueled by Yamal LNG, Ofon 2, Fort Hills, Kaombo Norte, Moho Nord and Kashagan.

Others were less successful in maintaining upstream momentum.

Despite a 34% jump in flows from the US Permian and Kearl shale plays, Exxon's output slipped 2% on the year and Conoco's 48% volume boost from the top three US shale plays was dented by a gas field outage off Ireland.

Eni cut its full-year production growth target after failing to grow its upstream volumes during the third quarter after gas sales were hit in Venezuela, Libya and Ghana.

BP, which saw its upstream growth stall in the quarter, now expects to beat a previous annual production growth target of 5% on average to 2021 after completing its $10.5 billion acquisition of BHP's US shale business.

Overall, global upstream activity is recovering and some analysts predicted a new wave of oil and gas mega-projects over the next 18 months fueled largely by planned giant, capital-intensive LNG plants and new deepwater oil developments.

But the current upstream recovery is slower than in previous cycles with development spending expected to increase just 5% this year, after a 2% rise in 2017, according to energy consultants Wood Mackenzie.

As a result, oil and gas producers need to boost their development budgets by around 20% to both meet future demand growth and ensure they can sustain oil and gas production into the next decade, Wood Mac said last month.


A key theme in the earnings figures remains the ability of the sector to sustain free cash generation growth as higher-margin, lower-cost projects come onstream and industry costs remain low.

Shell's cash flow was the highest in the decade during the quarter at $12.2 billion, a level comparable to when Brent was trading around $100/b, after its LNG trading unit made more money than its traditional upstream business.

BP reported its highest quarterly result in more than five years and said it was more confident in its financial outlook after the consensus-beating returns. As a result, the major now plans to pay for its $10.5 billion acquisition BHP Billiton's shale assets entirely in cash instead of raising equity for half the value.

"Upstream net income metrics are recovering from the 2016 trough and reflect an improving margin environment, from which to launch the next generation of investments," Simmons Energy said in a note.

Shell's financial self-assurance is also growing with major announcing an increase in the pace of its $25 billion share buyback program.


Despite the rising earnings, the oil majors were mostly keen to stick to their mantra of capital discipline to avoid a return to the profligate spending in years when oil was over $100/b.

In the short term, producers are committed to maintaining their capital spending plans.

BP said it remains at the bottom end of its $15-17 billion capex range for this year, helped by continued cost deflation driven by technology.

Exxon maintained its capital expenditures target of $24 billion for 2018, a figure expected to rise to $28 billion next year.

But with free cash flow supporting a company's ability to either pay dividends, buy back stock or make organic investments, investors are focused acutely on major's upstream spending plans. For now, at least, it seem the extra cash is still going into share buybacks and dividend increases.

With industry cost pressures starting to reappear, particularly in the US shale industry, modest capital spending increases are starting to show.

Chevron raised its organic capital budget for 2018 by 5% from to $19.2 billion and Conoco's capex guidance for 2018 was raised modestly to $6.1 billion up from a previous $6 billion figure.

But Europe's oil majors appeared more sanguine over the impact of cost inflation. BP said it is not seeing cost inflation outside the US onshore and Equinor actually lowered its 2018 capex budget from $11 billion to $10 billion.

Shell's CFO Jessica Uhl, however, noted the return of cost increases, saying the cost environment, particularly wage levels, had become tougher.


Production (mil boe/d) Y-o-Y Change Capex ($-bil) Y-o-Y Change Earnings ($-bil) Y-o-Y Change Refining Margins ($/b) Y-o-Y Change
ExxonMobil 3.79 -2.3% 6.59 10% 6.24 57% N/A N/A
Shell 3.60 -1.7% 5.83 1.5% 5.6 37% 3.53* -37%
Chevron 2.96 8.8% 5.12 15% 4.05 104% N/A N/A
Total 2.8 9% 2.57 -16% 3.96 48% 5.46 -17%
BP 2.46 0% 3.73 -6.5% 3.1 124% 14.7 -9.8%
Equinor 2.07 1% 3.07 17% 4.84 106% 6.9 -10%
ConocoPhillips 1.27 3% 1.59 47% 1.87 17% N/A N/A

Notes: European earnings figures on current cost of supply or adjusted replacement cost basis.
* = Rotterdam margins

-- Robert Perkins,

-- Edited by E Shailaja Nair,