Oil Producers' Cost-Cutting Swept Away by New Price Decline



(Bloomberg) -- Oil companies have spent three years slashing spending and firing workers to protect profits, only to find their hard work blown away as prices entered another bear market.

The MSCI World Energy Sector Index is heading for a second consecutive quarter of declines, mirroring the drop in crude. The 90 companies that make up the index, including giants like Exxon Mobil Corp. and Royal Dutch Shell Plc, have together lost $115 billion in market value since the start of April, according to data compiled by Bloomberg.

“The biggest companies are improving a lot operationally,” said Iain Armstrong, an analyst at Brewin Dolphin Ltd., which owns shares in major energy producers. “But the oil price will continue to drive the shares” and the outlook isn’t great.

Energy companies started the year on a high note. They were the best performers on the MSCI World Index in 2016 after the Organization of Petroleum Exporting Countries and its allies agreed to production cuts in December. However, the best first-quarter profit in years gave way to the realization that OPEC’s historic deal wasn’t eliminating the global supply glut as quickly as intended. Even an extension of the curbs until March 2018 couldn’t stop prices heading for the biggest quarterly decline since 2015.

Brent crude, the global benchmark, has fallen about 10 percent since the beginning of April as U.S. production rose and hundreds of millions of barrels of surplus fuel inventories proved difficult to shift.

Cost Cutting

Companies reacted quickly to the downturn that began three years ago after prices tumbled from above $100 a barrel to below $50 today. Producers squeezed their suppliers by renegotiating contracts, delayed or canceled costly projects and eliminated tens of thousands of jobs to show the world they could live with lower oil prices.

First-quarter results showed some payoff for all that work. Profit per employee had dropped steadily for Exxon Mobil, Shell, BP Plc and Chevron Corp. throughout the downturn. For Shell, that metric doubled in the first three months of the year compared with the preceding period as earnings rose.

Exxon and Shell covered their dividend with cash from operations in the first quarter at an average price for international benchmark Brent crude of just under $55. BP, which didn’t generate enough money to cover the payout in the three months to March, will be able to do so this year if oil is between $50 and $55, Chief Financial Officer Brian Gilvary said in May.

More Pain

That’s still not good enough for these companies to be able to start paying down debt or expand investments. Brent traded at $47.63 at 12:28 p.m. in London Friday, and banks including Goldman Sachs Group Inc. and Citigroup Inc. are still lowering their price expectations for this year.

For the moment, investors seem to be largely ignoring the operational improvements and focusing instead on prices.

The share prices of just 17 of the 90 companies in the MSCI World Energy Sector Index have gained this quarter compared with 27 in the preceding period. This has made energy the worst performer on the MSCI World Index this year.

Exxon and Shell’s B shares are down about 11 percent each this year, and Chevron and BP have lost 12 percent.

A wave of equity analysts downgraded dozens of oil-industry stocks last week, a day after crude slipped into a bear market. Macquarie Capital Ltd. in London cut ratings for Shell, Chevron, Eni SpA and BP, warning the companies may require “further, painful cost reductions” if oil slips lower.

--With assistance from Chiara Albanese and Francois de Beaupuy


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