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Bad news from the oil industry is not in short supply lately, and now two major companies, Royal Dutch Shell and ConocoPhillips, have simultaneously announced sharp cuts in spending because of what seems to be a non-stop erosion in crude prices.
Anglo-Dutch Shell announced on Jan. 29 its earnings in the fourth quarter of 2014 were $4.2 billion, nearly twice the $2.2 billion earned in the same period of 2013 but below analysts’ expectations. Shell’s yearly earnings were $22.6 billion in 2014, up from $19.5 billion the year before.
Because of the analysts’ disappointment, Shell’s stock dropped immediately by 5 percent in London trading. The company responded by saying it would freeze dividend payments to investors, slash $15 billion from capital spending over through 2017 and reduce its shale operations everywhere.
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Virtually at the same time, ConocoPhillips reported a net loss of $39 million in the fourth quarter of 2014, compared with earnings of $2.5 billion in the same period of 2013, and, as with Shell, they were below analysts’ expectations. During the entire year of 2014, ConocoPhillips earned $6.9 billion, compared with $9.2 billion in 2013.
Only last month, ConocoPhillips, the third-largest US energy company by market capitalization, announced that because of the plunging price of oil, it would slash its 2015 capital spending by 20 percent. On the latest news it added a further 15 percent to its spending cuts.
Just how these cuts will shape up isn’t known yet in full, but so far there are some plans already in progress. Shell CEO Ben van Beurden told Bloomberg TV just after the earnings announcement that the company will review spending on some 40 projects around the world. “We see pressure on our investment program,” he said. “It’s a game of being prudent but at the same time not overreacting.”
Nevertheless, van Beurden promised investors that they’ll see their dividends of 47 cents per share – though no more than that – regardless of Shell’s earnings. He said the dividend is an “iconic item at Shell. I will do everything to protect it.”
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ConocoPhillips’ plans are equally vague so far. The company announced that it will postpone exploration and drilling programs to pare its capital budget by $2 billion to $11.5 billion. It’s also been selling off lower-value assets so it can concentrate on those that are more profitable. They include shale wells in North Dakota and Texas, the core of the recent boom in US oil production.
“We are responding decisively to a weak price outlook in 2015 by exercising our capital and balance sheet flexibility,” said Ryan Lance, ConocoPhillips’ chairman and CEO. “In this environment, our priorities are to protect our dividend and base production, stay on track for cash flow neutrality in 2017 and preserve future opportunities.”
Of course Shell and ConocoPhillips aren’t the only energy companies driven to cut spending by weak oil revenues. BP has frozen employee pay and Chevron has postponed its budget for drilling. Norway’s Statoil, Ireland’s Tullow Oil and Britain’s Premier Oil all have dug deeply into spending on exploration and postponed other projects.
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