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Analysis: Oil majors maintain focus on breakevens as low prices weigh

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Analysis: Oil majors maintain focus on breakevens as low prices weigh

Highlights

Q2 earnings hit by prices, weak downstream

M&A activity key in lowering breakevens

Shell targets $30/b breakeven portfolio

London — Squeezed by macroeconomic headwinds and weaker prices, global oil majors are dusting off their fighting talk in pursuit of lower-cost upstream projects.

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In Europe, BP bucked the trend by posting higher than expected earnings helped by trading gains and a lower tax bill. Shell, Total, and Eni all missed consensus forecasts as weak downstream performance extended the damage from lower prices.

In the US, ExxonMobil and Chevron saw refining and chemical pain offset strong volumes growth from shale.

All felt the pinch from a 7% year-on-year fall in Brent oil prices and tumbling natural gas values. Weaker prices are piling more pressure on the majors to show they can still stick with capital discipline targets, deliver promised output growth while generating enough cash to meet pledges on spending and dividends or buybacks.

During earnings calls with analysts, company bosses were keen to talk up the resilience of their upstream portfolios, despite the adverse environment in term of prices and downstream margins.

With Brent crude hovering around $60/b amid a wave of bearish sentiment on the outlook for global trade, oil majors have yet to shake off their fixation with efficiency and lower breakevens developed in the wake of the 2014 price collapse.

Oil majors' cash flow recovery under pressure

HIGH-GRADING

Tell-tale corporate-speak on earnings calls such "portfolio high-grading" is a testament to the renewed attention to cost discipline and stronger resilience to low prices.

France's Total, which is digesting its $8.8 billion takeover of Anadarko's African projects, earmarked the sale of $5 billion worth of non-core, lower-margin assets by the end of 2020, mainly from its upstream business.

It believes the Anadarko assets, which include a stake in Mozambique's maiden, multibillion-dollar LNG project, are key to lowering project breakevens to below $40/b. Total hopes the deal will generate around $300 million of free cash flow between 2020 and 2023 at $50/b.

"Our priority is not volume growth but value growth. So we will take benefit from this growing production coming from the Anadarko assets...to sell some non-core and higher-breakeven assets...to be more and more resilient," CEO Patrick Pouyanne said on an earnings call.

With trade tension escalating between the US and China and questions over longer-term oil demand growth due to climate fears, producer concerns over upstream resiliency and breakevens are well placed.

On Tuesday, Fitch slashed its Brent oil forecast for 2020 by more than $10 to $65/b, as rising trade tensions crimp oil demand growth expectations. In 2021 Fitch sees Brent faring even worse, averaging just $61/b.

Posting its worst adjusted earning since late 2016, Shell found itself defending the rationale of its strong focus on gas after earnings from its market-leading LNG business slumped by 60% on the year. It partly blamed weaker-than-expected chemical results, citing the US-China trade dispute weighing on demand.

"What you are seeing today is not only the effect of a macro-economic weakness in a number of sectors but a number of one-off effects on our earnings which has nothing to do with resiliency," CEO Ben van Beurden told analysts.

Shell has based its future earnings targets on a Brent oil price of $60/b, underpinned by new, lower-cost upstream oil and gas projects set to take its average upstream breakeven to $30/b from about $40/b currently.

"We obviously have a portfolio design and a high-grading process...you see there are assets at low breakeven prices, the assets that can withstand the range of macroeconomic outcomes and still be okay at the bottom of the cycle," he said.

Shell, which does not issue production targets, said in June it is banking on its US shale investments to grow its oil and gas production over the coming decade as it pushes into renewable energy and power sector investments.

DOUBLING DOWN ON SHALE

Shell's Permian shale assets are already cash flow positive, with breakevens on operated assets of $35/b, which beats 75% of operating results from the sector, according to the company.

In the US, both Chevron and Exxon continue to double down on efforts to chase volume growth from shale despite the weaker price environment.

Exxon said it is sticking to its plan to spend $30 billion this year and between $33 billion and $35 billion in 2020. The US oil giant appears less cautions over the prospect of stubbornly low oil prices in the coming years, reiterating its desire to invest counter-cyclically to lock in lower asset values.

Chevron, which plans to spend between $19 billion and $22 billion each year from 2021 to 2023, is taking a more judicious line on spending.

Speaking to analysts last week, its CFO Pierre Breber said the company's recent crop of asset sales have helped bring down its cash flow breakevens to the "low $50s" over the last year. The major is also on track to divest between $5 billion to $10 billion of assets by 2020.

-- Robert Perkins, robert.perkins@spglobal.com

-- Edited by James Bambino, newsdesk@spglobal.com

S&P Global Platts Global Energy Awards Nomination deadline: September 9, 2019

The S&P Global Platts Global Energy Awards, now in its 21st year, recognizes top performers -- industry leaders and innovators just like you. The awards program offers 18 categories both for business and individual achievement. It's simple and free to nominate.

For category details and to nominate: