With oil company revenues set to drop on the back of a rout in prices, boards will have to cut investments and increase borrowing to maintain their cherished dividend payouts.
OPEC's decision on Thursday not to cut production in order to prop up oil prices sent markets reeling. Oil company shares slumped, wiping billions off firms' market value and leaving dividend payouts as the only solace for shareholders.
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The majors have hacked back spending and sold assets worth around $150 billion over the past four years, increasingly relying on that income to reward shareholders.
The idea that companies cannot turn a profit by simply pumping oil from the ground will be strange to anyone who has not kept up with the industry's transformation in recent decades.
Oil majors are employing more complex technology to open up more marginal prospects and keep oil and gas output growing, sending their operating costs soaring in recent years.
The realization that oil prices could remain in the $70-$80 a barrel range for a prolonged period, after averaging around $110 a barrel between 2011 and 2013, is putting renewed strain on already lean balance sheets.
And as their boards prepare to present their 2015 budgets at the beginning of the year, they face some tough choices.
BORROWING TO RISE
With a dwindling number of available assets for sale, companies are now expected to benefit from their low gearing levels in order to maintain dividends.
"While oil prices are below $80 the majors will be paying dividends out of debt. They can live with higher gearing but they will not cut dividends," said Iain Reid, analyst at BMO Capital Markets investment bank.
"Majors could easily live with gearing of up to 40 percent (of equity) and the market won't punish them so much because they are resilient."
At the end of the third quarter, Shell, BP, Chevron and Exxon all had debt-to-equity ratios well below 20 percent, while Total's ratio was higher at 29 percent, according to the companies' results.
As they come to terms with the new oil regime, companies will cut spending by up to 10 percent in 2015 from a this year and delay new project approvals.
"Projects that are under construction will move forward, but new project will be delayed. I don't think we will see many final investment decisions (FIDs) in the first half of 2015," said Jason Gammel, analyst at Jefferies..
Investors will move to safe havens such as Shell, which has a very sound balance sheet, Gammel said.
Goldman Sachs analysts estimate that European integrated oil companies require oil at $122 a barrel to maintain their budgets at current capital expenditure budgets.
In order to maintain the long-term sector average of a 4.5 percent free cash flow yield by 2018, companies will have to trim capex by as much as 28 percent with oil at $70 a barrel, according to Goldman, who see Eni and BG Group as their top picks.
(Reporting by Ron Bousso; editing by Keith Weir and Tom Pfeiffer)
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