| HOUSTON, March 8
HOUSTON, March 8 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: 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
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
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."
Most majors are planning strong production growth until at
least 2021, a Reuters analysis of the latest investor
presentation and corporate plans showed.
The firms - Royal Dutch Shell, Exxon Mobil, Chevron, BP,
Total, Statoil and Eni - plan to grow output
by a combined 15 percent in the next five
It could take another year before the biggest companies'
cash from operations exceeds their combined capital spending and
dividends, Citigroup estimated. It projects the major oil
producers will need to sell their oil for between $55 and $60
per barrel this year just to cover those two big costs.
Chevron Corp, which expects positive cash flow this year,
says it could generate an additional $3.5 billion selling its
oil at $55 a barrel, a figure predicted to be 2017's average
price in a Reuters poll of analysts and economists.
Exxon Mobil Corp and BP have signaled they will spend more
on expansion projects this year than in 2016, a sign of optimism
about stronger pricing.
Higher production could deliver fresh money that can be used
to hire workers, reduce debt or boost shareholder payouts.
It would also be a welcome turn for an industry that has
been spending more cash than it generates and borrowing to pay
dividends that shareholders expect, regardless of the state of
John Watson, Chevron's chief executive, said in late January
he wants to "maintain and grow" the oil giant's dividend,
calling it his top priority.
Chevron is winding down construction of several big
projects, helping to stem its past spending rate and generate
more revenue as new operations come online.
France's Total SA is raising its dividend by 1.6
percent this year, the first time in three years, and says it
expects to cover its capital spending and cash dividend with oil
above $50 a barrel.
The gains are driven largely by the OPEC output cut in
November - the first in eight years. The agreement to reduce
supply by about 1.8 million barrels a day runs through June, and
OPEC and Russia are expected to review the cut in May.
Some analysts expect the agreement to be extended, but the
cartel could just as easily resume higher production, squelching
the industry's nascent financial recovery.
Torgrim Reitan, head of U.S. operations for Statoil -
Norway's state-owned firm - said he has "stopped guessing" what
OPEC might do in crafting the company's plans.
“We need to be prepared for volatility," he said in an
interview at the CERAWeek energy conference in Houston. "This is
the time for leadership in the oil industry, the time for making
the right decisions that will fuel growth."
THE SHALE ADVANTAGE
Unlike the major producers, U.S. shale companies are better
equipped to live with volatility. When prices rise, they ramp up
drilling and lock in returns with price hedges, which Chevron,
Exxon and other large producers typically don't do.
When prices fall, shale producers can more easily cut
spending than the majors because of their small size.
Shale producers' ability to pour more of their new cash into
production is feeding technology developments that allow them to
squeeze more oil out of existing wells and at a faster pace than
a few years ago.
"Those who withstood the storm and survived have learned
just how nimble they can be," said Avi Mirman, chief executive
of Lilis Energy Inc, a shale oil producer in west
Similar approaches are belatedly being adopted by the
biggest producers. Chevron is embracing a short-cycle approach
to investing in projects that can go into production in months,
However, Alastair Syme, who tracks global oil and gas
companies for Citigroup, cautions the continued cost reductions
by shale producers could thwart OPEC's ability to prop oil
prices through production cuts, undercutting the cash flows
needed to rebuild.
"If shale producers can grow U.S. supply at between 1
million and 1.5 million barrels a day, it'll be a challenge for
everyone to respond to that," he said in an interview.
(Editing by Simon Webb and Brian Thevenot)