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Big Oil’s Big Payday Finally Arrives

Big Oil’s Big Payday Finally Arrives thumbnail

Big Oil’s big payday has finally arrived. The question now is how to spend the extra cash.

Investors will be reading the third-quarter tea leaves to discern whether executives plan to boost dividends and buybacks, hike spending on shiny new mega projects, or perhaps even do both.

What they do know is that fresh sources of oil and gas are needed over coming decades to meet the world’s insatiable demand for energy. Spending too much would defy the new-found commitment to financial discipline, while spending too little could choke new supplies and raise crude prices. Higher prices, in turn, may brighten the appeal of green technologies that would hasten the industry’s demise.

“We’ve certainly seen more discipline in the oil patch than we really ever have,” said Burns McKinney, a Dallas-based portfolio manager who oversees $13 billion at Allianz Global Investors. “Management are more wary about which projects they take on. But discipline never lasts forever.”

Oil companies need to develop the equivalent of 670 billion barrels of crude — about seven times Exxon Mobil Corp.’s total worldwide holdings — by 2040, largely to offset dwindling output from older fields, according to the International Energy Agency. The financial costs will be enormous.

The good news is that Big Oil has plenty of cash to invest. The industry will generate $175 billion in free cash flow this year, about as much as it did over the previous five years combined, according to consultant Rystad Energy AS. Third-quarter earnings will be about 45 percent higher than a year earlier and the most since 2014, according to Morgan Stanley.

Price Surge

That mimics the 45 percent year-on-year rise in international oil prices to a third-quarter average of $75.84 a barrel.

The bad news is oil companies have a history of over-spending on ambitious projects and acquisitions during boom times only to see returns crushed when the commodity cycle turns. For examples, look no further than Exxon’s $16 billion investment in Canadian oil sands over the past decade and Chevron Corp.’s Gorgon liquefied natural gas operation in Australia, where costs swelled by almost half to $54 billion.

There are signs it may be different this time. Both U.S. supermajors replaced long-time CEOs since the 2014-2016 downturn, appointing former refining chiefs who oversaw penny-pinching business units. Spending on oil production is down 37 percent globally over the past four years, according to Wood Mackenzie Ltd.

Below Norms

For now, the sector is out of favor. The weighting of energy stocks in the S&P 500 Index is below 6 percent, less than half what it was a decade ago.

“Valuations remain well below previous historic norms,” Gordon Gray, a London-based analyst at HSBC Holdings Plc, wrote in an Oct. 17 note. “Consistency of improved cash generation and of capital discipline” is needed to win over investors.

Here’s what to look for in the earnings reports of the five biggest international oil companies:

Total (Friday Oct. 26)

The key figure will be its 2018 production growth target, which was previously pegged at 7 percent. Startup dates for key projects such as Egina and Tempa Rossa.

BP (Tuesday, Oct. 30)

Details on asset sales of about $6 billion to fund new buybacks. The British company has pledged to retain capital discipline, though it recently raised its long-term internal price deck to $60 to $65 per barrel.

Royal Dutch Shell Plc (Thursday, Nov. 1)

Chief Executive Officer Ben van Beurden’s commitment to a capital budget of $25 billion to $30 billion will be closely watched. Whether he sanctions the expansion of its Sakhalin LNG facility in Russia or its Baltic LNG project.

Exxon Mobil (Friday, Nov. 2)

The company is looking to bounce back from dismal second-quarter performance that Senior Vice President Neil Chapman called “a low point.” Commentary on how to boost short-term performance before major projects

Chevron (Friday, Nov. 2)

The $3 billion in annual buybacks announced in July was made with “a bit of conservatism,” CFO Pat Yarrington said at the time, so investors will look for any signs of a hike. Permian output was up 50 percent year-on-year in the second quarter but can that continue with shortages of pipelines, roads, power and labor?


69 Comments on "Big Oil’s Big Payday Finally Arrives"

  1. Anontarded1 on Thu, 25th Oct 2018 8:47 am 

    guys, bruce springsteen said what you do to survive kills the things you love.
    i will now proceed to crank up the fear meter by advocating for islam …my guide will be supertard john esposito for the purpose of moving the stock market.

  2. I AM THE MOB on Thu, 25th Oct 2018 8:59 am 

    Notice that nearly every country the US has problems with now has oil?

    Russia, Venezuela, Syria, Iran…and don’t forget Iraq and WMD’s..

    And they are all fake issues made up out of thin air..

    Venezuela has a dictator..(even though he was democratically elected)

    Iran is building secret nukes (even though the IAEA said they are not)

    Syria’s president is gassing his own people (even though Putin removed his chemical weapons back in 2014 and was nominated for a Nobel peace prize for it)

    Russia is meddling in the US election (the evidence is a few twitter and fb trolls)

    “Is the brotherhood even real?
    That Winston you will never know.”
    -Orwell 1984

  3. onlooker on Thu, 25th Oct 2018 9:00 am 

    What are they doing with our oil asks the US?

  4. Anontarded1 on Thu, 25th Oct 2018 9:04 am 

    ^mm^ the muslim brotherhood is all peace and love. they’re just maligned by the west through fear that’s all.

    look how supertards will go war with china in 15 years in defense of islam/uygur. china jailed so many of muslims that’s why they’re our enemy. same thing with putin and invasion of checnya

  5. Garlic Naan on Thu, 25th Oct 2018 9:35 am 

    Well, all I can say is I had naan for breakfast and it was good.

  6. Dredd on Thu, 25th Oct 2018 11:13 am 

    The Payday for Oil-Qaeda will come when the trance subsides (Choose Your Trances Carefully – 2).

  7. Shortend on Thu, 25th Oct 2018 11:17 am 

    Shortonoil is promoting the book “Decline” that his BennyW Hill group put together to be published by Spring…so everyone relax and have a nice Holiday Season and Turkey Dinner.
    Seems collapse is put on hold until then and we shall see on Amazon the reviews…that should be entertaining…perhaps

  8. Boat on Thu, 25th Oct 2018 2:03 pm 

    Short promised the end of oil in about 2 months. Shrinking demand should have started over a year ago. Tick tock the clock is almost out along with few comments from the gang that supported him. Imagine that. Now a book, lol.
    Remember the camel pee and cobwebs on drilling rigs brought to you by PHD. Maybe this time he will push out the crash date to sell more propaganda.

  9. Anontarded1 on Thu, 25th Oct 2018 2:04 pm 

    supertard boat (ps) is right

  10. Anonymouse1 on Thu, 25th Oct 2018 2:26 pm 

    Look, the retard got some time off from his retard treatments and they gave him access to the internet again. Must be how they reward retards in texASS for good behaior, or something. Thanks for taking the time to share your retard insights with us boatretard.

  11. I AM THE MOB on Thu, 25th Oct 2018 4:56 pm 

    Saudi Arabia’s might as an oil producer is being tested

    Will it be able to fill the gaps left by smaller producers?

    Oil traders are inherently strong-stomached, but even for them October has been a woozy month. On October 3rd the price of Brent crude reached $86 a barrel, a four-year high. On October 23rd it slid to $76, on the news that demand might ebb, stockpiles rise and production increase. At the centre of this is Saudi Arabia, the world’s most powerful petrostate. Khalid al-Falih, the country’s oil minister, said on October 23rd that the kingdom was prepared “to meet any demand that materialises”. But that is not an easy task.

    Exports from Iran have plunged and are due to fall further after November 4th, when new American sanctions take effect. Even as America’s crude production soars, President Donald Trump has demanded that the Organisation of Petroleum Exporting Countries (opec) boost output to lower prices. Saudi Arabia seems keen to appease him, both because it supports the sanctions and because of anger over the killing of Jamal Khashoggi, a journalist, in the Saudi consulate in Istanbul. But the gains from producing more are uncertain. Both opec and the International Energy Agency (iea) have cut their forecasts for oil demand in 2019.

    Even if Saudi Arabia wants to fill the gap left by Iran, it is not clear that it can. That is in part because Saudi output is already so high. As Iranian exports have dropped since May, when Mr Trump announced the sanctions, Saudi Arabian exports have picked up. The kingdom is producing more than 10.5m barrels of oil a day (b/d); officials claim the capacity to produce around 12m. “They can reach about 11m barrels with relative ease,” explains Neil Atkinson, head of oil markets at the iea. Analysts debate how quickly—or whether—the country can ramp up to 12m b/d. “They have never actually proven they can do that,” says Ehsan Khoman of mufg, a bank.

    Saudi Arabia may also be unable to counter weakness in smaller petrostates, where supply could drop unexpectedly. In the past six months Nigeria, Libya and Venezuela have helped to offset falling exports from Iran. But they are a volatile trio.

    Violence and political unrest make production in Nigeria and Libya prone to big swings. The situation is more extreme in Venezuela where, thanks to political turmoil, production is about half of what it was in early 2016. Still, Venezuela produced 1.2m b/d in September. Exports actually increased by 250,000 b/d between April and September, according to Bernstein, a research firm, equivalent to more than half the rise in Saudi exports in that period. There is ample room for Venezuela’s output to drop further.

    The result may be further dramatic swings in the market, with Saudi Arabia’s oil production put to the test. “It is the first time in modern history that countries have faced so many restrictions at the same time,” according to Mr Atkinson of the iea. Much depends on just how far exports from Iran sink—some countries are pushing for waivers from sanctions. Mr Falih remains confident that Saudi Arabia can help provide stability. But as it increases output, spare capacity may reach a record low by the end of the year. “The more they produce, the less there is in the tank for any additional supply outages,” says Mr Khoman. Get ready for a bumpy ride.

  12. I AM THE MOB on Thu, 25th Oct 2018 5:12 pm 

    Former McCain adviser: Trump has ‘stoked a cold civil war’ in America

  13. Antius on Thu, 25th Oct 2018 5:31 pm 

    Let’s just hope that he can win it. Best case scenario – the Dems make a failed attempt at civil war. It galvanizes white America against them. Trump launches a full investigation into anti-Democratic activities. The Dems are disgraced; Jewish interference in American politics is exposed and laws are imposed to ensure balanced ownership of the media. Jewish power in the US is significantly curtailed. As white attitudes harden and the deep state is exposed and destroyed, America drifts towards an age of apartheid. The declining demographic situation suddenly matters a lot less, since darkies can no longer vote. America earns a stay of execution.

  14. makati1 on Thu, 25th Oct 2018 6:07 pm 

    Vile Ass – “Watch how the US has fooled the world into believing their economy is strong by printing USD. GDP on top, money printing in middle.”

    There! Fixed it for you!

  15. makati1 on Thu, 25th Oct 2018 6:13 pm 

    America is going down. Civil war will bring out the guns and deaths in the street. A locked down police state is in its future. No one is gong to destroy the Deep State. It is part of the Great Leveling that the OWG Club wants.

    With over 50% of Americans on the dole, they will vote for that free stuff to continue. Who will promise it and then provide it? Wait and see. There are no political parties, just the Deep State.

  16. boney joe on Thu, 25th Oct 2018 9:24 pm 

    “You sound like all of those doctors my wife made me see before she left me. DDT

    You’re taking the first steps toward recovery by facing your inadequacies.


  17. Antius on Fri, 26th Oct 2018 7:42 am 

    Germany’s energy transition is beginning to look more and more like a transition to natural gas. A few wind turbines have been thrown in for good measure as a virtue signal to the country’s Green Left.

    Sadly, these people have killed off the only source of energy that could have made a real difference in terms of displacing fossil fuels. And they seem to be getting stronger, in Germany at least. In the years to come, they had better be ready to tow Putin’s line on the global stage. He will control whether or not they get to eat. Never underestimate the ability of stupid people to ruin the world. Pucker up Krauts, get ready to kiss uncle Vlad’s arse!

  18. Antius on Fri, 26th Oct 2018 9:59 am 

    This man dared to be rude to a black woman on an aeroplane and now the British police are round his house ‘investigating’ him for ‘speech crimes’.

    Not that he should have been rude of course. But what the hell are the police doing getting involved in something like this?

    It is things like this that make me hate the British authorities. Their oppression; their arrogant moral absolutism; their self-appointed right to monitor and police peoples ideas and opinions.

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