OPEC Deal Tests Oil Majors' Appetite for Risk and Reward

OPEC Deal Tests Oil Majors' Appetite for Risk and Reward
OPEC's deal to cut production and boost prices gives oil companies the opportunity to shake off two years of layoffs and slumping profits to start investing again.

(Bloomberg) -- OPEC’s deal to cut production and boost prices gives oil companies the opportunity to shake off two years of layoffs and slumping profits to start investing again -- if they still have the risk appetite.

Just ask  Patrick Pouyanne, chief executive officer of Total SA. Throughout the downturn he’s consistently warned that tens of billions of dollars of investment cuts around the world will create an oil-supply shortfall within a few years. The situation presents an opportunity for the French producer and refiner, which will consider next year whether to start developing expensive new projects.

The question is, do wary investors really want him to put his money where his mouth is?

“Total must continue to allocate investments cautiously and bank on low oil prices,” Ahmed Ben Salem, an analyst at Oddo Securities, said by phone from Paris. The company should be seeking ways to drive production growth beyond 2020, but only on “projects with break-even of no more than $45 or $50, because the OPEC decision may be valid for just six months.”

There’s no guarantee that Pouyanne is right. While his sentiments have been echoed by other influential figures in the industry such as International Energy Agency Executive Director Fatih Birol, Rex Tillerson, outgoing CEO of energy giant Exxon Mobil Corp. and future U.S. Secretary of State, says there’s no looming supply gap.

Investment Decisions

What’s beyond doubt is that the two-year oil slump has prompted an unprecedented wave of retrenchment across the industry. The worst appears to be over after Brent crude, the international benchmark, gained more than 40 percent this year. The rebound accelerated after the Organization of Petroleum Exporting Countries agreed to the first production cuts in eight years.

Still, the price is about half its mid-2014 level and companies remain conservative -- cutting spending in order to boost cash flow and protect dividends as debt rises. The biggest project approvals in recent months have focused on expanding existing facilities -- BP Plc’s Mad Dog Phase 2 in the Gulf of Mexico, Chevron Corp.’s Tengiz expansion in Kazakhstan -- rather than tapping completely new areas.

Investors see plenty of reasons for a company to be cautious, but they also acknowledge that anyone willing to invest now could reap the benefits later, particularly with the cost of developing new resources declining as suppliers cut their prices.

Under Stress

Total was “really under stress” in 2015 and 2016 as it made heavy investments in new projects just as prices plunged, Pouyanne said at a conference in Paris in October. Now, costs paid to service providers have fallen by 30 to 40 percent and there’s a need for new developments so the world can have sufficient supply in three to five years, he said.

Total is preparing for final investment decisions in 2017 to develop the giant Libra deep-water field off Brazil and a large onshore project in Uganda. It’s just signed a preliminary deal to develop a large gas field in Iran and is working toward approval for a second phase of the Zinia offshore field in Angola after reducing the expected cost by half to $1.4 billion.

While the pledged cuts from OPEC and Russia lifted Brent crude above $55 a barrel last week for the first time in more than a year, there’s cause to doubt whether they will be fully implemented. Supply from countries including Libya, Nigeria is exempt from curbs, while some non-OPEC nations are counting natural declines as voluntary cuts. Brent traded at $53.92 a barrel at 10:49 a.m. in London on Friday.

“The industry’s difficult to assess, even if we’re very positive on Total’s fundamentals,” said Benjamin Philippe, a fund manager at Degroof Petercam Gestion in Paris, whose funds are underweight in Total shares, mostly for regulatory reasons. “I always favor companies with a mid- to long-term view. The implementation of the OPEC decision will be key.”

OPEC’s agreement will have no impact on investment decisions next year, Pouyanne told Bloomberg in Paris on Dec. 1. Total “is working on projects that are competitive, regardless of the price,” he said.


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