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* Seven oil majors ran annual cash deficit of $55 bln
* Falling oil price to force new wave of asset sales
* Asset sales close to $150 bln, some dividend yields top 6pct
* Repeat of M&A boom as response to low oil prices seenunlikely
By Ron Bousso and Dmitry Zhdannikov
LONDON, Oct 9 (Reuters) - This year's fall in energy pricesis hastening the decline of big oil, as the seven Western majorssell-off assets, cut investment, return money to shareholdersand shrink in size, leaving ever more output to small producersand state firms.
Companies that were already deep in the red when the priceof Brent was at $109 a barrel last year are having to redrawbusiness plans for prices as low as $90.
With promised shareholder dividends probably untouchable fornow, they will have to divest, cut costs and borrow more againsta smaller business just to make ends meet. And unlike inprevious downturns, they are no longer big enough to ensure thattheir own cutbacks will drive prices and profits back up.
According to Morgan Stanley analysts, the seven majors -Royal Dutch Shell, BP, Exxon Mobil,Chevron, Total They generated $207 billion of operating cash flow butinvested $209 billion in capital expenditure and returned $53billion to shareholders in dividends. All have promised investors to do better this year bycutting their capital investment and operating expenses - whichmushroomed in recent years on the back of cost overruns anddelays at projects such as Kashagan in Kazakhstan or Gordon inAustralia - both estimated to cost over $50 billion. But the latest drop in oil prices to a two-year low leavesfew options other than to continue shrinking by sellingprojects, oil fields and refineries. And given that the seven majors have already sold assetsworth $150 billion in the past four years, they are graduallyturning from super-majors into mini-majors: still among thebiggest companies in the world but no longer with the size tobend prices to fit their investment cycle. "Oil companies are in a period of circumspection, which willonly be prolonged with the oil price pullback... It is quiteclear the business cannot sustain itself with Brent below $100,"said Charles Whall, fund manager at London-based Investec AssetManagement, which invests in Shell, Total, Chevron, Exxon andStatoil. Last year, most majors would have needed a price of $120-130per barrel to balance their budgets without borrowing, sellingassets or cutting payments to shareholders in the form ofdividends and share buybacks. With promised spending cuts, financials were expected to beback in balance by 2016 based on average oil prices of $110 abarrel, according to Morgan Stanley, which also estimates thatevery $10 per barrel fall in oil prices translates into a 12percent decline in earnings. NO OIL PRICE HELP An old mantra in oil markets says that when prices fall toosharply, companies respond by cutting investment, which in turnleads to an oil shortage several years down the road, helping topropel prices so companies can start a new investment cycle. That theory may simply no longer work for oil majors. In 2003, Exxon, Shell, BP, Total, Chevron and Eni produced11.5 million barrels of oil liquids per day, or 14.5 percent ofglobal output of 79.6 million bpd. Fast forward 10 years andtheir smaller output of 9.5 million bpd is equivalent to only10.4 percent of larger global production of 91.6 million bpd. "Oil majors have very little leverage over actual oil pricestoday," said Jason Gammel, analyst at Jefferies. Meanwhile the engine of today's growth in oil output - theU.S. shale oil boom - is driven mainly by mid-sized and smallproducers such as Anadarko, Apache, Occidental and Devon, rather than the majors. And technology improves so fast on U.S. fields that whatlooked uneconomical two years ago looks economical today, evenwith lower prices. According to an analysis from Barclays, 90 percent ofproduction from the U.S. Bakken province will still beprofitable even if oil prices fall to $60 per barrel. EATING ITSELF For now, the one form of expenditure that many analystsbelieve the majors cannot cut is dividends to shareholders, whomight revolt if they no longer get their expected payouts. "Prices will have to go below $90 for companies to startputting projects on the back burner. But dividends is the lastthing they will want to cut," said Iain Reid, analyst atinvestment bank BMO. According to BMO, Exxon and Eni are effectively tradingtoday as if oil prices were at $102 a barrel, partly thanks todividend payments that keep the share prices up. For some of themajors, dividend yields are as high as 6 percent. To keep up such payments, majors are effectively eating intothemselves and will have to sell tens of billions of dollarsworth of additional assets in the next years, according tobanking and oil industry sources. In recent years they have been able to borrow cheaply - allof the majors but Exxon are paying out dividends at a higheryield than their cost of borrowing. But if historically lowinterest rates go up they will no longer be able to fund theirdividend payouts with ever more debt. One way to maintain their stature might be to merge. Thelast collapse in oil prices at the end of the 1990s triggeredthe wave of oil mega-mergers that produced the present bigseven, when BP bought Amoco and Arco, Exxon bought Mobil andTotal bought Elf and Fina. That seems unlikely to be repeated. "I think most easy mega-mergers have been already done. Itis difficult to see French Total and Anglo-American BP opting tomerge," said a senior mergers and acquisitions banker at a topWall Street bank, who asked not to be named. Reid from BMO agreed: "Majors' strategies today are allabout capital discipline and free cash flow, not mega mergers". (Additional reporting by Sam Wilkin; Editing by Peter Graff)
