Despite Slump, Major US Oil Cos Forge Ahead with Investment

HOUSTON (Dow Jones Newswires), May 4, 2009

The weak quarterly results of major U.S. oil companies show they are not immune to lower oil and gas prices and the economic downturn. But their decision to keep investing billions in capital projects reflects optimism about an eventual rebound in energy markets.

These companies' commitment to long-haul projects, although key to shoring up their hydrocarbons production and reserves, comes at a price: fewer perks for shareholders in terms of dividend increases and share buybacks, and an increase in debt as lower revenues result in constrained cash flows.

"We do have a strong capital program, that's where our priority really is," said Chevron Corp. (CVX) Vice President and Chief Financial Officer Patricia Yarrington during a conference call with analysts Friday.

Big Oil's unflinching approach to investment underscores the long-term nature of their niche in the energy business - the execution of multi-year, multi-billion-dollar projects that produce massive quantities of oil and gas. It also reflects lessons learned from the last oil bust, when a sharp cutback in investment resulted in the energy crunch of recent years.

"If you look at (major oil companies') spending they are certainly not counting on prices staying were they are at all," said Phil Weiss, an analyst with Argus Research in New York. "That is one of the reasons they built strong balance sheets - because when times get weak, you have more cash and borrowing capacity if you need it to keep things intact until the environment gets better."

Chevron's 2009 capital program is about $23 billion, unchanged from last year, but the company suspended share repurchases earlier this year and froze its quarterly dividend. Yarrington said Chevron, the second largest U.S. oil company by market capitalization behind Exxon Mobil Corp. (XOM), could see a modest increase in debt over the course of the year if energy prices remain at their current level. Houston-based ConocoPhillips (COP), which has curbed capital spending, said its debt ratio of 34% could stay at the same level or increase.

Exxon Mobil, of Irving, Texas said Thursday it had increased its first-quarter capital spending by 5% from last year and added it could increase its $29 billion annual spending program if a good opportunity comes along. Exxon increased its quarterly dividend, but pared back its share repurchase program.

ExxonMobil's first-quarter earnings dropped 58% from a year earlier to $4.55 billion. Chevron's profit fell 64% to $1.84 billion. ConocoPhillips' earnings fell 80% to $840 million. If these weak earnings persist, some analysts fear that their spending strategy may backfire.

"If we see there is going to be cash flow outspending and (oil companies') balance sheets are deteriorating and not sufficiently strong to weather the storm, we will start to be more worried about their credit rating," said David Lundberg, a credit analyst at Standard & Poor's.

Bright Spot: Service Costs

Despite weak earnings, the three U.S. majors see a bright spot in today's grim economic environment: rapidly dropping costs for materials and oil services.

Lower-than-expected costs helped boost ConocoPhillips' earnings, and continued renegotiations with suppliers could enable Big Oil to maximize the effectiveness of its capital spending.

"We're seeing some decline in vendor rates and material prices flowing through to our operating expenses," said David Rosenthal, Exxon Mobil's vice president of investors relations, in a conference call.

Chevron's Yarrington said that the steep drop in costs, which has ranged from 10% to 60% in some contracts, is expected to accelerate.

The company has had "1,000 individual meetings with key suppliers" to renegotiate contracts, she said. "We're working very hard to secure lower costs."  

Copyright (c) 2009 Dow Jones & Company, Inc.

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