Oil’s Relentless Slide Takes Toll on European Crude Producers

Oil’s relentless slide to the lowest since 2009 will force European producers into more drastic cost cuts as investors flee the industry.

The start of the year’s first full week of trading saw the region’s largest oil producers tumble as benchmark crude dropped to $53 a barrel, less than half the price six months ago. Italy’s largest oil producer, Eni SpA, led declines, tumbling the most in six years, while France’s Total SA lost 6 percent and BP Plc more than 5 percent.

“Big oil needs to quickly adjust to this new environment,” Citigroup Inc. analysts including Alastair Syme wrote in a report published Jan. 5. The bank expects oil to average just $62 this year, cutting earnings per share for major oil companies by an average of 29 percent through 2017 and putting pressure on companies to postpone more projects.

For executives preparing to present 2014 earnings early next month, the next few weeks will be fraught as they recalculate scenarios for oil prices on which the outlook for earnings and investment decisions are based. In a measure of just how far the pendulum has swung, French explorer Total said at an investor day in September it was deciding on projects based on oil prices at between $100 and $80 a barrel.

“2015 will be more about what the major oil companies don’t do, rather than what they do,” Biraj Borkhataria, analyst at RBC Capital Markets in London, said in an interview. “Exploration budgets will likely come down, and many may look to re-engineer and re-design major projects in order to reduce costs.”

Global Glut

Brent crude oil fell below $53 a barrel for the first time since May 2009 as record supplies from Iraq and Russia bolstered speculation the global glut will linger. Brent slumped 48 percent last year.

Some producers are better armed to withstand the sharp plunge in crude prices than others, according to analysts.

Should Brent average $70 a barrel over the longer term, Raymond James Euro Equities said in a Jan. 5 note it would “not be buyers of any” of the so-called European integrated oil companies it covers. The brokerage favors Royal Dutch Shell Plc because it’s less indebted the competitors, and says BG Group Plc would also have some “upside” with crude at an average of $80 a barrel long term.

At the other end of the spectrum stands Austrian explorer OMV AG for which the drop in crude comes at a bad time after a series of costly acquisitions, according to Raymond James. A cut in the dividend is “very likely” and selling of production assets in the downturn would be “value destructive.”

Eni Downgraded

For Eni, weaker oil prices will add to the drag of underperforming businesses such as gas and power and oil-services company Saipem SpA and disruptions in Libya, according to Citi’s Syme. The bank downgraded the Italian oil company to a sell recommendation from neutral and said an impairment of the troubled Kashagan project in Kazakhstan is possible.

Industry capital expenditure could fall by a fifth this year, according to Sanford C. Bernstein analyst Oswald Clint in a Jan. 5 report. This will mean less funds for refining and “more shuttering of underperforming European assets should be expected in 2015.”

For investors, the question remains whether oil companies will be able to maintain the level of dividends should crude prices remain low for an extended period. In 2009, when oil tanked the last time, upstream spending was cut, downstream even more so while dividends were maintained, according to Bernstein.

“Even in the worst case scenario that we stayed at $60 a barrel oil prices for the next three years, the probability of dividend cuts remains low,” it said.

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