Oil Majors Still Years From Repairing Balance Sheets After Price War

Oil Majors Still Years From Repairing Balance Sheets After Price War
Financially strapped oil producers are spending billions to boost production before it's clear that recent crude price gains brought on by OPEC output cuts can be sustained.


HOUSTON, March 8 (Reuters) - Financially strapped oil producers are spending billions to boost production before it's clear that recent crude price gains brought on by OPEC output cuts can be sustained.

Five of the largest publicly traded oil companies - BP, Chevron, Exxon Mobil, Royal Dutch Shell, and Total - are trying to work down debts that totaled $297 billion at the end of December. That nearly doubled the companies' 2012 debt levels.

But even with oil prices about 70 percent higher than a year ago, most companies have yet to reach the point where their cash flow covers annual shareholder payouts and expansion projects vital to the industry's long-term survival.

Add other expenses, such as the interest on debt, and the break-even point is pushed out until at least 2020, industry analysts from Citigroup estimated.

"For the entire oil and gas industry, balance sheets have never been worse," said Fadel Gheit, an Oppenheimer & Co oil industry analyst. Producers, he said, "were in critical condition and have been upgraded to guarded."

For a graphic on oil majors' debt, cash flow and capital spending, see: http://tmsnrt.rs/2mzgTVc

For now, U.S. producers are taking advantage of the price increase spurred by OPEC's production cuts to boost their output. Some of the oil they are pumping would not have been profitable at $40 a barrel, but is with prices holding steady above $50.

The industry is betting that prices will maintain a delicate balance - high enough to repair balance sheets and finance new projects, but not so high that it creates a new glut.

If crude maintains a price in the mid-$50s per barrel, the biggest oil producers could see their cash flows increase by 71 percent on average over 2016, according to Citigroup.

The danger is that too many wells could come back online too soon, undercutting OPEC's effort to reduce global inventories. That could send prices back to the 12-year lows of early 2016.

U.S. shale producers in March are forecast to pump 79,000 barrels a day (bpd) more than in February, when shale contributed about 4.75 million bpd to U.S. output, according to the U.S. Energy Information Agency, reversing production declines last year.

Shale output could rise more than 500,000 bpd by the end of the year, said Daniel Yergin, vice chairman of analysis firm IHS Markit and an oil historian.

"U.S. shale has demonstrated that it's still a player," Yergin said in an interview. "It's going to continue to be a major factor in the global market."


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Walt Yaeger  |  March 08, 2017
The United States of America, the New OPEC That sounds pretty far fetched doesn’t it? The United States of America needs to import over 50% of the oil it needs to survive every day. The Organization of Petroleum Exporting Countries has such a surplus amount of oil production that they export more than 50% of the oil they require to survive every day. Two and a half years ago, for the first time in its history, instead of cutting back on exports of crude oil when worldwide oil inventories were building, Saudi Arabia decided to export even more oil to protect its market share. This led to a precipitous drop in the price of oil from a high of about 120 dollars a barrel to a low of around 25 dollars a barrel. This made profits for all but the OPEC countries virtually nonexistent. Yes, it looked like Saudi Arabia and OPEC were about to take over again, by driving all their completion out of the oil production business and then raising the price back up to make up for the two trillion or so dollars that they lost in the “oil war” that they created. The only thing is, this is not the way things are playing out in the oil patch today. The problem is not so much that the price of oil did not respond to their manipulation of the market, as to the fact that they failed to put their main competition out of business. Yes, they did cause total oil production in the United States to drop from 9.5 million barrels of oil a day to 8.5 million barrels, and that one million barrel drop a day came from the shale oil patch. However, and this is the problem for OPEC, even though the price of oil is about half the price of two and a half years ago, oil production from shale in the United States, is now on the upswing. In other words, even though the oil produced from shale in the United States is not profitable at these prices, production is ever increasing. The oil companies are shooting themselves in the foot. They are trying to time this market, and are betting that oil prices will increase enough in the future to make their investments profitable. Here is the problem. The more they produce, the more they will drive the price of oil down. When the price of anything in this world is not high enough for someone to make money from producing it, no one will have it. We must have oil to survive. Because of the lack of investment in oil exploration over the last couple of years we have already created a giant hole in our future supply of oil. Last year we only discovered enough “new oil” to last 45 days, and this year it will be less than that. Does that sound like a crisis to you? This production gap will hit as early as 2019. The oil price war has already taken out future investment in offshore oil production and production from the oil sands in Canada. Future oil production has to include these markets. AS I see it, there is only one way out of this dilemma. The Unites States government must use the US dollar to break the back of OPEC before they take away our ability to produce oil in this country. Our government must guarantee loans that are made to oil companies that are producing oil in the Unites States. I know it sounds a little farfetched and that we have just suffered through the worst financial disaster in 80 years because of the government backed mortgage meltdown, but we are in a far worse situation today. Companies that produce shale oil in this country are not profit centers, they are debt magnets and the course they are on, is a race to the bottom. They must not be allowed to fail. We need to drive the price of oil down to a point where even Saudi Arabia and OPEC cannot produce it and make a profit. Just think about that for a minute. We drive our economy through the roof because of the low price of energy and ruin theirs. We are already 20 trillion dollars in debt; my bet is that it will only take another 2 trillion or so invested to put them under. The Venezuelans are already starving because the price of oil has dropped below the point where they can sustain themselves. Saudi Arabia and OPEC just have a lower production price than them that’s all. They will fall like dominoes as they collapse from within. We won’t need to spend any more money funding military operations in the Middle East. ISIS won’t have the money to buy food much less ammunition. Let’s drain this swamp once and for all.