Oil at $60 is the magic number for producers

For Europe’s biggest oil companies, $60 is the magic number. BP, one of the first companies to predict a prolonged price downturn, has “reset” its business to generate surplus cash flow, with oil at about $60 a barrel by 2017.

It joins Total, which last month unveiled investment cutbacks and project delays that will enable it to fund dividend payouts in the same circumstances, without the need to borrow.

A year after oil sank into a bear market, the industry is preparing for an extended downturn, with drillers slashing investments in exploration and production by a record 20% this year, according to the International Energy Agency.

With third-quarter-earnings season barely under way, producers in the US have already written down the value of their assets by $6.5bn (€5.88bn).

BP’s chief financial officer, Brian Gilvary, doesn’t expect a recovery in prices until late 2016.

“For the next nine months, I can’t see any up-move,” Mr Gilvary said. “We’re in the process of resetting the company.

Annual spending at the producer, led by chief executive officer, Bob Dudley, will remain curtailed at $17bn to $19bn, to 2017, the company said, as it reported a 40% drop in third-quarter profit”.

Total, Europe’s No 2, has similar plans, trimming investment to $20bn or $21bn in 2016, from as much as $24bn this year, the company said at its annual strategy update last month.

The cuts are intended to keep the companies’ dividends safe.

In the first nine months of this year, with Brent crude averaging about $56, BP’s cash flow from operations and asset sales totalled $16.9bn, not enough to cover $18.5bn in capital expenditure and dividend payouts, according to the company.

If oil recovers to $60 in two years, the companies say they will have sufficient cash flow to maintain payouts to shareholders, while still investing in new projects for the future.

“Total first, and now it’s BP,” said Alexandre Andlauer, a Paris-based oil sector analyst with AlphaValue.

“The aggressive cost-cutting is laying the road towards that target. Maybe there’s more to come, with more companies announcing earnings later this week.”

Statoil plans to cut investments this year by $1bn to $16.5bn, as third-quarter earnings missed analysts’ estimates, the Norwegian company said yesterday.

Royal Dutch Shell, Total and Italy’s Eni announce earnings later today.

Shell halted an oil-sands project in Alberta and will record a $2bn charge, the company said on Tuesday.

That follows the company’s decision to walk away from drilling in Alaska, last month, after spending $7bn looking for oil.

Europe’s biggest oil company is already planning for a long stretch of low prices, CEO, Ben Van Beurden, said this month.


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