Breaking Even Becomes Goal in Oil -- WSJ

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (October 27, 2017).

The world's biggest oil companies have a suddenly popular measure for success: breaking even.

Once obscure and little noted, the break-even number has become an obsession for investors in oil giants such as Exxon Mobil Corp., BP PLC and Chevron Corp. as crude prices stay mired between $50 and $60 a barrel. At its simplest, the metric represents the oil price that a company needs to generate enough cash so it can cover its capital spending and dividend payouts.

Brent crude was trading at just below $60 a barrel this week, down from over $114 in June 2014.

BP says its break-even was $47 a barrel in the first half of the year, and the company is targeting between $35 and $40 a barrel by 2021, assuming prices stay about where they are today. Overall, Europe's biggest oil companies have cut break-evens to around $50 a barrel, according to Barclays. Exxon doesn't release a break-even but has succeeded in covering its costs with cash from operations for the last three quarters, when international benchmark Brent crude averaged just over $51 a barrel, according to Barclays.

Investors focused on the healthy dividends that make oil-company stocks appealing say they will be watching for news about break-even prices as Exxon, Chevron and Total SA prepare to announce third-quarter earnings on Friday, and BP and Royal Dutch Shell PLC next week.

"It's a crucial thing we look at," said Rohan Murphy, energy analyst at Allianz Global Investors, which holds stocks in BP and other large oil companies. "If the oil price were $70 it wouldn't matter so much, but at the moment we're on a knife edge, so it matters more."

The industry's intense focus on the break-even represents a stark change from the era of rising oil prices, when the emphasis often was more on companies' ability to increase production rather than to generate cash.

BP's share price slumped 4% in February after the company said it needed oil to hit $60 a barrel to break even this year. Six months later, BP said spending cuts allowed the company to break even at $47 a barrel in the first half. The stock moved up 2%. The company has kept its dividend unchanged throughout the downturn.

At Total's investor day last month, the phrase "break even" came up around 30 times.

Big oil companies say they have made progress in cutting costs since 2014, when oil prices entered a long downturn. The companies say they can maintain those lower levels of spending, bring down their break-even costs further and begin again to expand their operations -- all without relying on an oil-price recovery.

"The break-even cost of oil and gas companies is going to the $40s and $30s today," BP Chief Executive Bob Dudley told the Oil & Money conference in London this month. "It's actually healthy. I think $100 a barrel was not healthy."

Investors, however, remain nervous about the viability of their dividends. While big oil companies are back in black, many of them are still not generating enough cash to cover the payouts, despite ambitious targets to lower break-even prices.

The methods companies use when disclosing their break-even prices often vary from company.

Chevron says it can break even this year at $50 a barrel -- if revenue from its asset sales is included. Total says it will be able to break even at less than $30 a barrel in 2019 -- excluding its dividend costs.

Total, Shell and other companies use so-called scrip programs that allow them to pay a portion of their dividend in company stock, which helps them bring down the oil price they need to cover spending. While effective, the tactic isn't sustainable in the long-term without diluting investors' holdings.

Companies also often refer to project-specific break-evens, another metric that has new currency since prices crashed. Shell has said it is looking at new projects that can be profitable even if oil is at less than $40 a barrel, but that doesn't reflect the overall price the company needs to cover spending and dividends.

U.S. shale-oil players have faced particular criticism from investors over how they define project break-evens, sometimes not accounting for all associated costs, such as the amount they pay to lease land. Most shale companies claim their wells generate a 20% rate of return or higher, even at today's prices. Yet in the last three years, almost none has posted a positive quarterly net income.

Few investors cared about the break-even when oil prices were $100 a barrel or more. Back then, the industry was consumed with finding new sources of oil, resulting in spending that caused the break-even for big European companies to balloon to $152 a barrel in 2013, Barclays says.

Now, companies that once chased megaprojects are using new technology to eke out more barrels and lower costs.

BP said it expects production costs this year to be 40% lower than in 2013. Chevron is working to bring down its break-even to a point where it can sustain the company's decadeslong tradition of dividend increases. Shell is moving toward a lower debt target that will allow it to turn off its scrip program and commence share buybacks.

In a sign that things are improving, Norway's Statoil ASA said Thursday it will remove its scrip program in the fourth quarter, fully covering its dividend with cash.

Total has said it would be able to cover its full cash dividend at $50 a barrel in 2019.

""The world has completely changed," Total Chief Executive Patrick Pouyanné told reporters earlier this month.

--Lynn Cook contributed to this article.

Write to Sarah Kent at sarah.kent@wsj.com

(END) Dow Jones Newswires

October 27, 2017 02:47 ET (06:47 GMT)