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Big Oil still reluctant to open spending taps - Goldman Sachs



By Ron Bousso and Dmitry Zhdannikov

Petroleumworld 10 12 2018

Energy companies and investors are focused on profits and reluctant to boost spending even after crude prices surged to four-year highs, a senior Goldman Sachs banker said on Thursday.

Rattled by the recent downturn in the sector and long-term concerns over oil demand and the switch to renewables, Big Oil is facing an unprecedented challenge.

“We're firmly through that survival phase and the better capitalized players are now positioned to do well on the other side of it,” Andrew Fry, global head of energy at Goldman said at the Oil & Money conference in London.

Companies typically seek to increase spending as they emerge from a downturn in order to capture low drilling costs and an expected supply shortage.

But this time round, the barriers for investments are high, with investors seeking returns of as much as 15 to 20 percent from multi-billion dollar oil and gas projects, Fry said.

“In the near term the focus is on returns as opposed to growth for the sake of growth,” he said.

As a result, companies are currently focusing on buying back shares and paying dividends to investors with the excess cash they generate.

“For the first time since the downturn, the oil companies now have their balance sheets in order. They are all starting to think about growth but it is very conservative,” James Janoskey, global co-head of oil and gas at JPMorgan, said.

“When we came out of downturns in the past, we didn't have energy transition issues and there probably wasn't that much pressure from investors.”


Capital expenditure among the world's top oil companies is expected to rise to $140 billion by 2021, from the current $100 billion, but will remain well below the $200 billion before the 2014 oil price collapse, according to Adam Brett, HSBC global head of natural resources advisory.

That means oil majors will show very healthy returns on capital invested, he added.

He said that even in the United States, where oil output has resumed spectacular growth on the back of high oil prices, large companies will try to maintain capital discipline and focus on returns rather than pure production growth.

“For Big Oil, value will prevail over volume,” Brett said, adding that most remuneration reports now made clear that top executives at oil majors are being rewarded for delivering robust cash flows rather than production increases.

Acquisitions, another way to boost production and reserves, are also expected to be constrained and focused.

Energy mergers and acquisitions amounted to $360 billion last year and stand at $280 billion so far this year, said Brett.

Although the volume of M&A has been relatively stable in recent years, the structure has changed since China largely suspended its buying spree over the past three years, he said.

An anti-corruption drive and revisions of overly expensive deals have prompted China to cut down on buying resources around the world in the past three years.

Brett said that M&A were currently dominated by downstream and mid-stream transactions with the share of upstream declining to 35-40 percent, from as high as 60-70 percent when China was an active asset buyer.

“You see much more downstream M&A activity. And I expect this to continue in the years ahead,” Brett said.



Story by Ron Bousso and Dmitry Zhdannikov from Reuters. 10 11 2018

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