When the price of a commodity falls, there are two ways for companies to react: Either cut costs and even sell assets to improve cash flow, or to invest – if you can afford to.
The past week saw examples of both approaches. On Aug. 26, Schlumberger Ltd., the world’s largest oilfield services company, said it will spend about $12 billion to buy Cameron International Corp., a leader in making oilfield equipment. The deal is intended to streamline Schlumberger’s operations and attract customers by bundling service and equipment fees at lower prices.
The next day, Total, France’s oil and gas giant, took the other tack, saying it would sell a gas pipeline and a gas terminal in the North Sea for $905 million as part of restructuring plan that includes a reduction in investments, an increase in oil production and a cut in investment costs.
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Total said it will sell its 225-mile Frigg UK Pipeline, which stretches from the Frigg field in the North Sea, and its terminal in St. Fergus in northern Scotland to North Sea Midstream Partners. Although the Frigg field is no longer operating, the pipeline still serves the St. Fergus terminal, which can accommodate 2.6 billion cubic feet of gas per day.
Total says it hopes to dispose of $5.5 billion worth of its minor assets this year to boost revenues at a time of depressed oil prices. The company says it’s been overproducing crude for Europe at a time when demand there has fallen by 15 percent since 2008. The company attributes the lower demand to Europe’s desire to reduce dependence on fossil fuels and the increased efficiency of new cars.
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The Paris-based company also is facing strong competition from oil producers in the United States, who have been relying greatly on hydraulic fracturing, or fracking, to extract generous amounts of oil and gas from underground shale formations.
Already, in July, Total made more than $880 million by selling a 20 percent stake in Laggan-Tormore, a deepwater gas field about 75 miles west of Scotland’s Shetland Islands. The buyer was the British energy generator SSE.
More sales may be coming. Total CEO Patrick Pouyanné said in February that his company would increase and accelerate its program to cut expenses begun by the previous CEO, Christophe de Margerie. Pouyanné said much of the cost-cutting would focus on energy fields in the North Sea, where Total has lately been investing “almost zero.”
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As for the sale of the Fergus pipeline and terminal, Total’s chief financial officer, Patrick de La Chevardiere said it was “another example of Total’s strategy of active portfolio management and the strong potential to unlock value from a range of infrastructure assets.”
North Sea Midstream said the sale will breathe new life into the North Sea energy industry. Revenues from the region have plunged not only because of the plunge in oil prices during the past year, but also because decades of drilling have depleted its energy fields. Further, drilling equipment is aging and requires investment in maintenance and, in some cases, replacement.
“We see midstream infrastructure as crucial to the longevity of the North Sea and firmly believe that the independent ownership of such infrastructure can help maximize the ultimate economic recovery of the British continental shelf’s oil and gas reserves,” North Sea Mainstream CEO Andy Heppel said.
By Andy Tully of Oilprice.com
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Andy Tully is a veteran news reporter who is now the news editor for Oilprice.com