Have Oil Majors Really Adapted To $50 Oil?

The oil majors, by and large, have posted dramatically better financial figures for the second quarter, a sign that their cost reduction efforts are bearing fruit. They are no longer in the red, but at the same time, there is little chance that they will return to aggressive growth.

Here is a quick rundown of the headline figures for some of the largest publicly-traded oil companies in the world:

ExxonMobil: $3.35 billion in profits, double from a year earlier

Chevron: $1.45 billion in profits, up from a loss in the second quarter of 2016

Royal Dutch Shell: Net profit (on a current cost of supplies (CCS) basis) $3.6 billion, up more than triple from a year earlier                                                      

Total SA: Profits of $2.5 billion, up 14 percent from a year earlier

Statoil: Profits of $3 billion, three times higher than 2Q2016

BP: Replacement cost profit, used as a proxy for net profit, of just under $700 million in the second quarter, 5 percent lower than a year ago

ConocoPhillips: Loss of $3.4 billion, larger than a loss of $1.1 billion a year earlier

The numbers are positive for the most part. A few quarters ago, oil executives would have probably used this opportunity to lay out growth plans. But, after three years of low oil prices, the oil majors finally have come around to the idea that there is little chance of oil prices rebounding in a significant way. Oil prices are likely to remain low, perhaps for a long time, perhaps "forever," as Royal Dutch Shell's CEO put it.

Related: Shell Posts 700% Rise In Earnings, Prepares For 'Lower Forever' Oil Prices

That means that they have to reorient their strategies around $50 oil, not just for this year, but for the long-term. It's hard to overstate how radical a shift this is; for the most part, the majors have spent the last few years battening down the hatches and waiting for higher oil prices. Now, they are getting used to the idea that higher oil prices might never come, at least not to the levels of pre-2014.

That means forgoing extremely large projects in favor of smaller ones that have quicker turnarounds. The ultra-large and ultra-complex projects of yesteryear, such as the Kashagan complex in Kazakhstan, are likely a thing of the past. Instead, the oil majors are following their smaller rivals, pouring a larger volume of cash into shale drilling.

"Some companies such as ExxonMobil and Chevron re-directed large shares of their capital spending towards the U.S. shale patch while others bet on favorable prospects for deep-water offshore," wrote Alessandro Blasi, a program officer at the IEA, according to E&E News. "Yet, what they all have in common is a tendency to increasingly target smaller projects that can deliver paybacks over a shorter period of time. This is a notable change for an industry that has traditionally been dominated by long lead-time projects."

The multi-year cost-cutting efforts are starting to pay off. By all accounts, the majors have slashed production costs significantly, streamlining operations, standardizing equipment to a much greater degree, and using a wide array of modern technologies to limit spending. The New York Times lays out a range of areas in which the oil industry is cutting costs, using everything from videoconferencing to new computer modeling to raise production at a fraction of the typical cost from the past.

Ultimately, the oil majors have adapted significantly. The most important statistic is the fact that after years of losses, most of them have returned to profitability, even with oil at $50 per barrel. BP, in fact, said that its breakeven price is now $47 per barrel, down sharply from $60 earlier this year.

But these giants are not exactly sitting pretty. While they are profitable, many are just barely so. All have very large debt piles, which have ballooned enormously since 2014. Another downturn in prices would put them back in the red, ushering in another round of borrowing. This is to say nothing of the long-term existential threat facing the oil industry from permanently low oil prices and peak oil demand, something that Shell's CEO even touched on after reporting his company's financials. He sees peak oil within the next decade and a half, with oil prices remaining "lower forever."

Related: Aggressive U.S. Oil Sanctions Could Bankrupt Venezuela

Lower forever means that the largest oil companies will be forced to continue to be cautious, keeping spending in check and deferring large exploration and development. Investors recognize this and are demanding restraint. 

However, in the short run, with positive cash flow and their dividend payouts safe for the time being, top oil executives are breathing a sigh of relief. 

By Nick Cunningham of Oilprice.com

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