European oil firms dig deeper for savings

Some of Europe's largest oil firms are revisiting their capital expenditure (capex) budgets and cost-saving targets for the year as the prolonged oil price slump continues to take its toll on their balance sheets.

Of the six biggest European integrated companies, four had significant cash flow deficits in the first half of this year, despite sharp cuts to investment and costs (see table). Spain's Repsol and Italy's Eni were the only ones in the group to generate enough free cash flow to cover dividends in the period, a reminder of how difficult it is to balance the books in a sub-$50/bl oil price environment. Repsol's free cash flow was boosted by asset sale proceeds, while Eni's was flattered by one-off gains from the deconsolidation of gas infrastructure subsidiary Snam.

Shell, BP, Total and Norway's state-controlled Statoil had negative free cash flow in the first half of the year, which means they had to take on more debt and tap cash reserves to cover funding gaps.

The persistent pressure on balance sheets has forced oil companies to keep their capex and operating expenditure (opex) under constant review. Repsol expects to come in "a little below" its €3.9bn ($4.3bn) capex budget this year, while Statoil has cut its 2016 organic capex guidance to $12bn from $13bn. Lower exploration spending will make up 20pc of Statoil's planned $1bn reduction. "We see efficiencies across all the portfolio. We see it in exploration. We see it in the projects in the US onshore. It is a downward trend across the portfolio," Statoil chief financial officer Hans Jakob Hegge says.

BP has found room to lower its 2016 organic capex forecast, too. The firm expects to come in below its previous guidance of $17bn this year. And it is on track to hit its target of a $7bn reduction in opex next year compared with 2014. BP is focused on delivering sustainable capex and opex reductions that will last beyond the present oil price downturn. But it plans to carry on taking advantage of deflation in rig rates and other supply chain costs, as well.

US oil service firm Schlumberger has suggested that the recent improvement in oil prices paves the way for suppliers to begin clawing back some of the pricing concessions forced upon them over the past two years (see p5). But BP thinks market rates for services and equipment have yet to bottom out. "We continue to see reductions in contractor costs," chief executive Bob Dudley says. And BP upstream chief executive Bernard Looney echoes Dudley's view that Schlumberger is being overly ambitious. "It is very early to be having that conversation about price recovery," he says.

Total has refined its 2016 organic capex forecast to $18bn-19bn, compared with previous guidance of under $19bn. "We will probably be at the low end of the $18bn-19bn range," chief financial officer Patrick de la Chevardiere says. And Total expects to exceed its target of $2.4bn of opex savings this year, compared with 2014. Shell is sticking to its $29bn organic capex guidance for the year, after reducing it from $30bn in June.

Project deferrals are helping the company keep a lid on spending. Shell has made just two final investment decisions since closing the BG deal — on petrochemicals projects in China and the US — and does not expect any more large projects to be approved this year. The proposed 13mn-26mn t/yr LNG Canada facility and the 15mn t/yr Lake Charles LNG development in the US are the latest Shell projects to be deferred. "We have not given an update on when we will reconsider these projects," chief executive Ben van Beurden says.

Free cash flow* $bn Company 1H16 1H15 Shell -19.4 2.7 BP -1.6 0.9 Total -3.0 -1.4 Statoil -2.0 -4.1 Eni €bn 3.2 -0.4 Repsol €bn 0.9 -6.8 *operating cash flow minus net investments

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