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LONDON (Alliance News) - BP PLC and BG Group PLC Tuesday joined Royal Dutch Shell PLC in slashing their capital expenditure budgets for 2015 and booking impairments and writedowns on assets in 2014, in response to the recent slide in oil prices.
The Brent oil price is currently trading around USD56 a barrel, down from over USD115 a barrel last June, and that's forcing the oil industry to review their spending plans and earnings expectations. With oil becoming harder, and hence more costly to extract, analysts fear that the industry contraction in the current cycle could be deeper than in previous cycles.
BP Tuesday said it has cut its 2015 capital expenditure plan by up to USD6 billion, while BG Group said 2015 spending would be USD6 billion to USD7 billion down on 2014. Last week, Shell reduced its capital investment for 2015, saying it would curtail USD15 billion of potential spending over the next three years, and could cut further if oil prices stay low.
BP Chief Executive Bob Dudley recently warned oil prices could remain low for the next three years, and Tuesday said the small rise in the oil price over the last three days could be a "short squeeze", which is why all three companies are being cautious with their budgets and capital.
"The scale of the capex reduction highlights BP's greater capex flexibility compared to some of its super-major peers, as BP has less capital tied up in mega-projects," analysts at Edison Investment Research wrote in a note to clients.
The moves by the big UK oil players are being reflected across the industry. US oil major Chevron Corp has cut its 2015 capital budget by 13% compared with 2014, while peer ExxonMobil Corp, which plans to reveal its 2015 spending plans in early March, slashed its share buyback programme in the first quarter by more than half to USD1 billion. The world's fifth oil major, Total SA of France, has indicated it will cut capital expenditure by 10% this year and put two oilsands projects on the back burner for a long time.
BP and BG Group both reported a fall in fourth-quarter earnings, as expected, but comfortably outperformed analysts' earning estimates.
BP's underlying cost replacement profit for the fourth quarter totalled USD2.2 billion, lower than the USD2.8 billion reported a year earlier, but significantly higher than analysts' expectations of around USD1.57 billion. Full year underlying replacement cost profit reached USD12.1 billion, down from the USD13.4 billion reported in 2013.
BG Group reported a 19% year on year drop in profit excluding impairment charges of USD915 million in the fourth quarter, but booked a a USD8.33 billion pretax loss after impairment charges, significantly wider than the USD1.57 billion pretax loss reported in the fourth quarter of 2013. The company booked a USD2.33 billion pretax loss for the full year.
Shell had reported current-cost-of-supply earnings of USD4.16 billion for the three months to end-December, up 93% from USD2.2 billion a year earlier, bringing the figure for 2014 as a whole to USD19.04 billion, up from USD16.74 billion in 2013. It said it had offset a revenue decline with cost cutting, but the profit figures still missed analysts' expectations.
All three companies have had to write down assets to reflect the current low oil price environment and as they switch focus to the most economically viable projects.
Shell's upstream earnings were hit by a USD664 million charge in 2014, whilst downstream took an even bigger hit of USD2.85 billion. Both charges are related to impairments, divestment gains and losses and redundancy and restructuring costs and the company said it is reviewing its upstream plays outside of the Americas, which "may potentially lead to future portfolio activities, well write-offs and/or impairments."
However, Shell did not relate any of its impairment charges to the fourth quarter.
"Unlike at Shell, BP chose to take large impairments this quarter in upstream to reflect the lower crude price environment, mainly in the North Sea, typically a higher-cost region, Angola and Brazil," says Edison.
BP booked a USD3.6 billion post-tax net charge for non-operating items in the fourth quarter, mainly relating to impairments of its upstream assets and to reflect the current low oil price environment, revisions to reserves and other factors. It also reported USD450 million in restructuring charges.
The total cumulative pretax charge for BP concerning the Gulf of Mexico oil spill at the end of 2014 was USD43.5 billion. An additional charge of USD477 million was taken in the fourth quarter reflecting increased provision for litigation costs and additional business economic loss claims. However, the charges laid out for the Gulf of Mexico do not include any provision for business economic loss claims, said BP.
BG Group reported a pretax non-cash impairment charge of USD8.9 billion, or USD5.9 billion post-tax, in the fourth quarter, which was driven by the fall in global commodity prices.
BG Group took on more debt in 2014, reporting a gearing level of 29.2% and net debt of USD11.99 billion, significantly higher than the gearing level at both BP and Shell. BP carried net debt of USD22.6 billion, equivalent to a gearing level of 16.7% whilst Shell reported a gearing level of 12.2%.
Analysts say the high gearing at BG Group will further limit its flexibility in terms of expenditure.
All three companies kept dividend payments fairly flat from 2013, as expected. Analysts had previously said BP was set to review its dividend in the first and third quarter of 2015, but BP said the dividend was its first priority despite the current market conditions whilst Shell confirmed its dividend would remain flat for the first quarter of 2015.
"2015 will be a challenging year for BP given weaker oil prices and further potential Macondo liabilities, but with gearing under 17% its dividend is well supported in the medium term," the Edison analysts wrote.
Investec says Shell's dividend is likely to remain unchanged throughout the whole of 2015.
Average daily production fell for all three oil players in 2014 by about 4%. Shell produced an average of 3.08 million barrels of oil equivalent per day in 2014, down 4% from 2013. BP produced 3.2 million barrels of oil equivalent per day and BG Group averaged 606,000 barrels of oil equivalent per day, also a 4% drop from 2013.
Shell Tuesday said it had taken the first steps in decommissioning the renowned Brent oil field in the North Sea whilst BP has recently announced job cuts in the North Sea, just some of the restructuring both companies are undergoing to lower costs and improve efficiencies to combat the low oil price.
Shell shares were up 3.1% to 2,133.00 pence per share on Tuesday morning whilst BP shares climbed 3.9% to 454.60 pence per share. BG Group shares, however, fell 0.2% to 932.30 pence per share.
By Joshua Warner; joshuawarner@alliancenews.com; @JoshAlliance
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