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PREVIEW-Stage set for oil major growth, in costly production
October 23, 2013 / 5:26 PM / 4 years ago

PREVIEW-Stage set for oil major growth, in costly production

By Braden Reddall
    Oct 23 (Reuters) - A prolonged period of heavy planned
spending looks to be ending for the big private-sector oil
producers, leaving investors to gauge how companies will manage
cash thrown off by big projects as they ramp up, and how much
will be eaten up by costs.
    Due out next week, the third-quarter results for the majors
- from Exxon Mobil Corp to BP Plc to Total SA
 - will be hit by an especially tough quarter for their
downstream arms, which refine oil and produce chemicals.
    Upstream production from wells, meanwhile, has been flat or
declining, though the outlook for next year looks better. So at
the top of analysts' minds this quarter will be how much cash
can be returned to shareholders, and how much will remain tied
up in capital expenditure to keep the oil and gas flowing.
    While higher oil prices boosted cash flow in recent years,
cost inflation now threatens to eat away at returns as oil
companies push the envelope with deepwater drilling and
liquefied natural gas mega-projects.
    "Rising capex will quickly undermine the positive arguments
that can be made for the sector," Deutsche Bank analysts wrote.
                        Exxon  Chevron   Shell   Total      BP
 Market Cap (BLN $)       384      231     217     144     137
 Q3 reporting date      10/31     11/1   10/31   10/31   10/29
 Q3 EPS estimate ($)     1.77     2.73    1.11    1.57    1.00
 Share Chg % last 90d    -7.7     -5.1    -3.5    16.2     1.4
 Capex (BLN $, Q2)        8.7      8.6     9.0     7.9     6.1
 Capex Chg% vs Q2-12       -7       21      28      15      23
 From StarMine - Shell, Total and BP share data based on ADRs
    Deutsche Bank noted the majors were guiding toward modest
capex growth after a decade where double-digit annual expansions
were the norm. Capital spending by sector leader Exxon even fell
last quarter, though that was after a 33 percent year-on-year
jump in the first quarter.
    "I wouldn't be surprised to see capex pulled back across the
board," said Mark Coffelt, head portfolio manager at Empiric
Funds in Austin, Texas, who felt oil prices were only high at
the moment because of Middle East security concerns. He expected
some higher-cost oil-drilling projects eventually to be shelved.
    After a dip in Exxon's production growth this year, Wells
Fargo analysts expect a 4 percent increase in 2014. Yet, they
forecast lower cash flow for the period from 2013 to 2015 than
the past three years, and have cut their valuation range for the
stock by $3 to $89-$97.
    Part of the target reductions were due to delays and
start-up challenges at Kashagan in Kazakhstan, the world's
biggest oil find in decades, in which Exxon, Royal Dutch Shell
Plc and Total all have a stake.
    It took 13 years and some $50 billion before output at
Kashagan was started in September, and output had been expected
to grow dramatically next year and in 2015. 
    Concerns about spending more to get less prevail among those
following the sector. Nomura Equity Research, while cutting 2014
earnings estimates for European majors, noted increased spending
on asset integrity and security for projects due to both BP's
Macondo spill and the Arab Spring uprisings. They also pointed
to longer planning times due to the greater complexity of the
    "Lastly, perhaps one of the greatest factors is exploration
expense," Nomura said. "The market has been slow to increase the
run-rate despite increased spend in drill-bit activity,
something that has increasingly placed downward pressure on
profitability in recent quarters."
    The comments followed an announcement by Chevron Corp
, ranked second by market value among the majors, of
third-quarter write-offs for exploration wells of between $100
million and $200 million - along with a warning about the impact
of refining on its quarterly results. 
    Investors in oil majors may have to grow more familiar with
such costly "dry holes," given that just one deepwater well can
cost in the range of $100 million, and Deutsche Bank expects the
share of Big Oil spending on deepwater to double by 2016.
    According to Barclays Equity Research, it was a doubling by
BP of its exploration spending in the past three years that
helped reverse its underperformance in that area - part of a
yet-to-be-completed strategic turnaround program.
    While Barclays acknowledged 2014 would see improved
production and cash flow for BP, the analysts saw little to
differentiate the company and stuck with an "underweight" rating
on the shares and a target price of 485 pence.    

 (Reporting by Braden Reddall in San Francisco; Editing by Terry
Wade and Marguerita Choy)

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