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The Oil Industry Is Facing A “Capex Conundrum”

Business

Oil industry executives are surely pleased with themselves this year, with both large and small companies reporting improved financials after years of struggling.

A Reuters survey finds a significant shift towards profitability for the U.S. shale industry after years of rising debt and negative cash flow. Reuters analyzed 32 independent shale companies, and about a third of them were cash flow positive in the third quarter. That may not seem all that great, but only three companies out of those 32 had positive cash flow a year earlier.

In fact, years of cost cutting is paying off for many companies, many of which have aimed to breakeven with oil prices at $50 or $60 per barrel. Not all are there, to be sure, but the increase of oil prices this year pushed many into profitable territory. The oil majors, on the other hand, are the most profitable they have been in years.

The big question now is what do they do with the windfall? Spend more in order to grow production or return excess cash to shareholders? This is shaping up to be one of the defining questions of this new oil era, especially for the largest oil companies.

To be sure, just about every oil executive trumpets their commitment to capital discipline when they get the chance. Wall Street clearly favors this approach. In the past, growth was the name of the game, and share prices rose and fell on growth in production and reserves. These days, profits and cash flow come first.

Last week, the Wall Street Journal pointed out the different stock performances of companies that pursue these different strategies. Over the past year, ExxonMobil’s share price has been flat, as it has announced an aggressive spending plan and multi-year campaign to grow production. Meanwhile ConocoPhillips is shrinking, selling off assets, and focusing on shale drilling and shareholder returns. Exxon’s share price is flat, but Conoco has jumped by 25 percent.

However, pursuing a strategy that prescribes returning every surplus dollar to shareholders is a recipe for long-term decline. The industry is “caught in a capex conundrum,” according to Tom Sanzillo and Kathy Hipple of the Institute for Energy Economics and Financial Analysis.

Already the oil majors are slipping. “In 2008, the energy sector commanded roughly 16% of total Standard and Poor’s 500 market capitalization. Today, that figure has fallen to roughly 6%,” Sanzillo and Hipple wrote in a commentary. “In 1980, seven of the top 10 companies in the index were oil companies. Today, only ExxonMobil is in the top 10 (ranking tenth).”

The uptick in oil prices over the first nine months of this year has buoyed optimism and led some companies to begin to ratchet up spending. It remains to be seen if that turns out to be a mistake, but the latest plunge in oil prices is a reminder of the risks in this volatile market. “The upshot to oil and gas industry turmoil is that sophisticated investors now treat oil and gas companies as speculative investments,” Sanzillo and Kipple wrote for IEEFA.

The recent fall in oil prices will probably solidify the newfound “capital discipline” approach by many oil and gas companies. At this point, that’s what Wall Street wants, and most executives in the industry appear willing to keep spending in check, having been burned by repeated downturns in prices over the last few years.

“Companies largely stated prioritization for returns and [free cash flow] instead of growth,” Goldman Sachs wrote in a note to clients after meeting with executives from several oil companies, including Occidental Petroleum, Apache Corp. and Range Resources.

“As its cash flow base grows, management indicated it would pursue dividend growth from its more secular cash flows and use cyclical excess [free cash flow] for repurchases or select opportunities for reinvestment,” Goldman said of Occidental’s plans. “Management indicated there would have to be a sustained change in oil prices in either direction to change capex plans.”

Investors are pleased that the industry is finally focusing on profits, and not simply growth. The flip side is that to some degree the industry is throwing up the white flag in terms of long-term growth. It’s not clear what that means five or ten years from now, but at this point, most oil and gas companies are focusing on near-term shareholder returns, not growing reserves for the next few decades. It’s a decidedly short-term strategy. But with peak oil demand and a climate crisis looming, that probably makes the most sense.

By Nick Cunningham of Oilprice.com



80 Comments on "The Oil Industry Is Facing A “Capex Conundrum”"

  1. Cloggie on Sat, 24th Nov 2018 3:27 am 

    Italy has found its own Trump/Mussolini:

    http://www.spiegel.de/politik/ausland/matteo-salvini-in-italien-streit-mit-bruessel-als-wachstumshormon-a-1240130.html

    Matteo Salvini is going for the gold. He is currently still in a coalition government, but Italy has completely surrendered to him and he aims at a majority for himself without his left-wing-populist “five star” allies. His enemies: third world immigrants and the EU. Not that he wants to leave the EU or even the euro, but this Caesar 2.0 wants to take the EU over. Not that he seriously believes he will become the successor of Juncker, not yet, but friend and foe admit that the populists will greatly expand there power in the upcoming EU elections. The #1 hero for Salvini is Vladimir Putin, the #1 enemy George Soros. Washington is warned. Or rather, Washington knows, witnessing the statement of Hillary Clinton earlier this week.

    Like 100 years ago, when the Italians were the first in Europe to respond to the communist threat from the USSR and turn fascist, again it are the Italians, the strongest identitarians and least globalist/imperialist people in western Europe, who respond to the US-imposed multicult threat and say no. F* you, George.

  2. Davy on Sat, 24th Nov 2018 4:37 am 

    “Davy, I noticed that you hedged your bet by saying that”the US may turn out to be the last man standing”. ‘May’ is a big word used a lot by deniers.”

    “May” is better than your “will” and “is”. Not only are you in denial you think you know for sure what many times you don’t know. When I see “will” and “is” about the future I see a fraud. The frauds I see most of the time is you and neder.

  3. Davy on Sat, 24th Nov 2018 4:40 am 

    “Davy, a year and a half before I decided it was a waste of time and money”

    IOW, a quitter like your country, family, marriage, the Mormon church. You don’t see a pattern?

  4. Davy on Sat, 24th Nov 2018 4:49 am 

    “No one reads your obtuse word-salads exceptionalturd”
    Anonymouse, how does it feel to be irrelevant and your gang disbanded in defeat. You do provide some meaning for billy. He still needs you. He calls out to you as anon like a father to a bastard son.

  5. Davy on Sat, 24th Nov 2018 4:55 am 

    “Matteo Salvini is going for the gold.”

    Wow, that comment was a happy face on a really bad situation that makes Brexit look like a walk in the park. You are so far down the hole of denial and delusions it is laughable. Your Euroland is coming apart and you try to put a happy faces on it. It doesn’t matter if it is political or economic. It is all good per neder in euroland.

  6. Davy on Sat, 24th Nov 2018 5:01 am 

    “Anon, Davy still doesn’t understand that writing styles are as good as fingerprints. The long spew above is typical of Davy, not MOB.”

    Billy, I don’t steal identities and play the puppeteer like your disbanded gang did. I call you out and kick your ass by my handle. I do this mainly because I am real not a fraud like you. I am not dishonest like your gang. Finally, I don’t have the time to play these games. Socks rarely say anything. They are generally used to attack someone. I say things billy and of course you and your disbanded beaten gang listen.

  7. Davy on Sat, 24th Nov 2018 5:40 am 

    Billy’s china:

    “China Offers $86,000 Reward For Snitching On Porn”
    https://tinyurl.com/ycwaom7g

    “Incentivizing neighbors to snitch on neighbors, co-workers to snitch on co-workers and family members to snitch on family members has been a hallmark of Communist Rule since the rise of Stalin. Now, the Chinese Communist Party is using these age-old techniques to root out a popular, if illegal, blemish on Chinese society: Pornography. After sentencing a writer of erotic stories to 10 years in prison in a high-profile case, China has doubled the reward for reporting the illegal publishing of pornography to about 600,000 yuan ($86,500), according to Abacus. The regulator in charge of enforcing the policy is called “Clean up the Pornographic, Strike the Illegal”

  8. Cloggie on Sat, 24th Nov 2018 5:56 am 

    Europe maybe losing Britain politically (probably not economically, not certain yet), there are new candidates knocking at the gate, yearning to become European:

    http://www.bbc.com/capital/gallery/20180910-a-city-turning-to-face-the-west

    Ukraine has the worst behind it (2.5% growth in 2017). It has (involuntarily) shed the Russian minority in Crimea and Donbass. They are still dirt poor, but once in the EU (as associate member) they will pick up, like all newcomers did. And, since they were not part of the US empire, they are ZERO political correct (some would even say that Ukraine is the most “Natzi” of all European countries) and wouldn’t dream of giving their country away to the third world. The country is larger than France, has 42 million inhabitants. And it is only a matter of time before Russia (142 million) will follow Ukraine in the direction of Europe, politically and economically. And militarily.

    Europe is destined to become less western, less Brussels, more eastern European, more Eurasian, more identitarian and less globalist. And as a consequence remain white.

    Capital Prague, replacing Brussels?

  9. Davy on Sat, 24th Nov 2018 6:21 am 

    “It has (involuntarily) shed the Russian minority in Crimea and Donbass.”
    So what is your point neder? What is that angle?

    “They are still dirt poor, but once in the EU (as associate member) they will pick up, like all newcomers did.”
    Sure they will neder. The EU is going to pick the world up because they are white and Euros

    “And, since they were not part of the US empire, they are ZERO political correct (some would even say that Ukraine is the most “Natzi” of all European countries) and wouldn’t dream of giving their country away to the third world.”
    You like the Nazi part don’t you. It is too late neder you are a host spawning millions of colored people as you fail to breed.

    “The country is larger than France, has 42 million inhabitants. And it is only a matter of time before Russia (142 million) will follow Ukraine in the direction of Europe, politically and economically. And militarily.”
    Dream on you goofy obsessive euro chauvinist. For One thing Ukraine and Russian are not especially friendly. OH, you have a solution to that one too…LOL

    Neder, man you are on here more than anyone. You don’t sleep. You are one sick MF. Give it a rest you are getting manic repeating the same off topic shit over and over like that will make it truer.

  10. boney joe on Sat, 24th Nov 2018 7:41 am 

    Disbanded? No, turd, it’s called the Thanksgiving holiday when normal people spend time with loved ones as opposed to you who spends every waking moment trolling this site.

  11. Davy on Sat, 24th Nov 2018 7:50 am 

    Boney Juan, is your pussy puppeteer afraid of facing me? He sure has been beaten. He is quiet and
    reserved these day. Probably depression or maybe he went back on his meds.

  12. Cloggie on Sat, 24th Nov 2018 7:54 am 

    “Neder, man you are on here more than anyone. You don’t sleep.”

    Pot-kettle.

    I sleep indeed 4 hours per night, giving me 20 productive hours per day, not necessarily to your advantage.

  13. Davy on Sat, 24th Nov 2018 8:06 am 

    Well, you need more sleep because many of your comments are sleep deprived IOW they run together like a blur. IMA, man, don’t you visit any eurotard sites? Is it that censored over there for an old Nazi? Do you do anything besides PC shit. Oh, you are giving away more personal info you said you wouldn’t.

  14. Cloggie on Sat, 24th Nov 2018 8:37 am 

    I do post at least as much on Dutch and German sites as I post here, nothing about energy though, all political.

    Excellent article about Brexit:

    https://www.volkskrant.nl/nieuws-achtergrond/historicus-fintan-o-toole-voor-sommige-brexiteers-is-de-eu-in-zekere-zin-nog-bedreigender-dan-de-nazi-s-~b3395ced/

    Irish historian Fintan O’Toole describes Brexit as a prank. The British, or English rather, absolutely have no plan what to do with Brexit. It is 100% nostalgia for an imperial world that no longer exists. A world destroyed by Churchill and the US, I might add.

    The English hate the “red tape” that comes with EU-membership, because before 1939 they enjoyed total souvereignty and freedom, they were the ones setting the rules. The British love to imagine that they won WW2, but in geopolitical terms they were the biggest losers of them all. They were intentionally toppled by their American “friends” from planetary pole position towards a middle tier lonely, rainy island with an Islamic capital.

    Got that?

    Britain loves to flirt with victimhood, with “being oppressed” by the EU, yearning for “taking back control”.

    According to O’Toole, Westminster is little more than Johnny Rotten’s Sex Pistols and “anarchy in the UK”. Boris Johnson never intended to win the referendum and was scared to death the day after. He never intended it to happen. The British love nothing more than an heroic defeat and Brexit was supposed to be another one. It didn’t. They are “back in control again” and that is scary.

  15. Cloggie on Sat, 24th Nov 2018 8:45 am 

    Spain and Britain reach agreement about Gibraltar. Spain will not get it back, not yet, but Gibraltar will get a special status:

    http://www.spiegel.de/politik/ausland/brexit-spanien-und-eu-einigen-sich-offenbar-in-gibraltar-streit-a-1240246.html

    Nothing now stands in the way between the EU and the UK. Now the EU withdraws and waits to see if May can push through Brexit through patliament. Expect big drama. The EU will not renegotiate, perhaps postpone a little. London has the final say:

    Europe or America.

  16. JuanP on Sat, 24th Nov 2018 9:37 am 

    Delusional Davy “Boney Juan, is your pussy puppeteer afraid of facing me? He sure has been beaten. He is quiet and reserved these day. Probably depression or maybe he went back on his meds.”

    The poor, pathetic, biggest American loser can’t understand that other people’s lives don’t revolve around posting BS on stupid online forums. What a sad fuck you are, Davy!

  17. JuanP on Sat, 24th Nov 2018 9:39 am 

    Delusional Davy “Neder, man you are on here more than anyone. You don’t sleep. You are one sick MF. Give it a rest you are getting manic repeating the same off topic shit over and over like that will make it truer.”

    ROFLMFAO! And you are going to claim THAT is not a projection, right Davy? LOL!

  18. JuanP on Sat, 24th Nov 2018 9:42 am 

    You are a repugnant delusional American exceptionalist piece of shit of an animal, Davy! You are the rotten scum residue of your country and the world.

  19. Davy on Sat, 24th Nov 2018 9:50 am 

    Flushed out the Boney Joe puppeteer. LMFAO. Flushed the turd out and as ususal he has nothing to say just a wimpier and a moan. Dirty Juan, you realize you are irrelevant and without your censorship gang, impotent. I love when a plan comes together.

  20. I AM THE MOB on Sat, 24th Nov 2018 10:00 am 

    Davy

    Nice A-Team reference at the end there..LOL

  21. Cloggie on Sat, 24th Nov 2018 10:02 am 

    “I love when a plan comes together.”

    https://www.youtube.com/watch?v=FPQlXNH36mI

    “Last man standing”

    https://www.youtube.com/watch?v=Q20wqWjiTco

    This is how davy’s skull looks from the inside: a 3-d film screen:

    https://www.youtube.com/watch?v=YXWFYPk11GM

    All his “wisdom” he receives from the media, but if he is let loose in the jungle, like on this forum, his “knowledge” turns out to be null and void.

    Mobster, same story.

  22. Davy on Sat, 24th Nov 2018 10:26 am 

    Translation: my dick is limp….metaphorical speaking

  23. I AM THE MOB on Sat, 24th Nov 2018 11:28 am 

    This is what would happen to Clogg if he ever went outside and spewed his hate..

    https://i.redd.it/winh24w8cwz11.gif

    LMFAO!

  24. I AM THE MOB on Sat, 24th Nov 2018 11:55 am 

    Russia is now a “far greater threat” to the UK’s national security than the Islamic State group, the head of the British army has said.

    https://www.bbc.co.uk/news/uk-46327046

    Russia is the new ISIS and Putin is the new Bin Laden..And you know what we did to them..

    LMFAO!

  25. I AM THE MOB on Sat, 24th Nov 2018 12:11 pm 

    During the Great Depression, the U.S. deported between 400,000 to 2,000,000 people of Mexican heritage. Approximately sixty percent of them were born in the U.S. Because the forced movement was based on race, and ignored citizenship, the process arguably meets modern legal definitions of ethnic cleansing..

    https://en.wikipedia.org/wiki/Mexican_Repatriation

  26. Hello on Sat, 24th Nov 2018 12:16 pm 

    >>> the process arguably meets modern legal definitions of ethnic cleansing.

    Too bad they didn’t round up the negros, that’s a blight in every US city. A bit of cleansing would do wonders.

  27. Cloggie on Sat, 24th Nov 2018 12:56 pm 

    Russia is now a “far greater threat” to the UK’s national security than the Islamic State group, the head of the British army has said.

    https://www.bbc.co.uk/news/uk-46327046

    Russia is the new ISIS and Putin is the new Bin Laden..And you know what we did to them..

    What did you do to ISIS other than creating them and paying these rent-a-terrorists from camps in Jordan a few hundred $/month to make them attempt to overthrow Assad for you?

    https://tinyurl.com/yad2fqts

    And miserably failed? You created ISIS, Russia destroyed them. Game, set and match Russia.

    Britain seems to think this is 1853 again and that they can organize a new Crimean expedition. The reality is that it won’t be long before the British will find themselves to be the neighbor of a new super power of 600 million, nuclear armed to the teeth. Once they are out of Europe, they can no longer prevent the upcoming European-Russian rapprochement.

    https://tinyurl.com/y94o5th3

    https://tinyurl.com/yd8h7ssm

    https://tinyurl.com/ycggdf7c

    I love Brexit!

    https://tinyurl.com/y6u7ksp7

  28. I AM THE MOB on Sat, 24th Nov 2018 1:33 pm 

    Clogg

    You think those are ISIS fighters with McCain?

    You are such a gullible moron..

    Pooty better find a fox hole to jump in Saddam insane did..

    Or

    Gaddafi sodomized: Video shows abuse frame by frame (GRAPHIC)

    https://www.dailymotion.com/video/xlxdrd

    I can’t wait to see Putins bloody torso and face hanging from a lamp post!

    LMFAO!

  29. Cloggie on Sat, 24th Nov 2018 3:35 pm 

    I can’t wait to see Putins bloody torso and face hanging from a lamp post!

    LMFAO!

    You mean like this?

    https://www.flickr.com/photos/9679871@N04/5269148455

  30. I AM THE MOB on Sat, 24th Nov 2018 4:03 pm 

    Clogg

    That is ancient history..And I think you have an obsessive disorder with Jewish people..Add that your list of mental disorders..

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