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Majors’ divestment dilemma

Depressed oil prices are forcing large-cap producers to roll back spending. But will they continue to try to shed non-core assets?

The equity markets had long been in a mood to reward large-cap international oil companies (IOCs) that pledged a very similar diet of capital disciple. Targeted spending in only the projects offering the best returns, lowered costs and cash returned to shareholders were firmly in favour.  And high-grading the portfolio by divesting non-core or high-cost assets was a de rigeur part of the story.

But no one expected or planned for an oil price of below $30/bl. Millions of extra barrels of oil have flooded the market in the past few weeks following the collapsed Opec+ talks. And the crisis is being aggravated by the Covid-19 pandemic, which has removed global energy demand on an unprecedented scale and could feasibly persist for months.

Slashing capex, opex and buy-back/dividend commitments is the priority for most IOCs in the immediate term. All the majors have either announced capex cuts or plan to reduce their spending significantly. Chevron, Shell and Total have each committed to reducing capex by $3-4bn this year. BP said it could lower its spending as much as 20pc this year and into 2021. ExxonMobil added that it could radically lower its capex. Other IOCs have followed suit, such as US independent ConocoPhillips’ 10pc capex cut pledge.

Total highlights the scale of the impact on a major’s finances. “This is a global economic crisis,” says CEO Patrick Pouyanne. “Global oil demand is likely to fall by 6mn bl/d in April due to the spread of the coronavirus, compounded by the crisis of supply. It would mean a loss of $9bn [to Total’s profits] were it to last all year.”

Setting targets

The drive to cut spending, generate cash and shore up the balance sheet could, in theory, make divestment an even more attractive option for large-cap companies this year. Question marks remain, though, over price and value but, perhaps more fundamentally, on how logistically feasible such deal-making would be.

Chevron was a prominent would-be seller pre-crisis—forecasting to sell $15-20bn in non-core assets between 2020-22. The firm secured buyers for assets in Azerbaijan, Colombia and the Philippines in the fourth quarter of last year, although Chevron has confirmed only the last of the three has closed as yet.

“Asset divestitures are likely to be a poor source of financing, and any proceeds will be generated at fire-sale prices” Gammell, Jefferies

Restrictions on travel and face-to-face meetings should not derail transactions this close to the finish line, but the buyers may want to return to the price they are paying. And the firm’s less advanced plans to sell Appalachian shale gas assets look set to be at least delayed.

“We are not divesting to generate cash. We are really high-grading our portfolio for investment competitiveness and performance.” Chevron CEO Mike Wirth told an investor call prior to the full impact of the Opec+ disintegration and Covid-19 spread.  That may have to change.

Other companies had also been targeting significant divestment. ExxonMobil has promised $15bn in divestment sales by 2021. Shell achieved $5bn in asset sales last year and aims to deliver $10bn from combined sales by the end of this year. BP thought itself likely reach $10bn in offloaded assets this year and expects to increase this to $15bn by mid-2021. 

Buyer’s market

Analysts speculate that divestment will be more difficult in the current economic climate, especially when it comes to capital-intensive projects. “I think with such weak oil prices it will be a challenge to high-grade portfolios by offloading high cost assets,” says Jason Kenney, an equity analyst at Spanish bank Santander.

$15-20bn – Chevron’s forecast asset sales

Others agree, pointing out that assets may be sold at a discount. “Asset divestitures are likely to be a poor source of financing, and any proceeds will be generated at fire-sale prices,” says Jason Gammell, an equity analyst at US bank Jefferies. “There will be few buyers with both the liquidity and the risk appetite to pursue all but the cheapest of assets.”

But, even if they must abandon their divestment strategies, large-cap IOCs are in better financial shape than they were before the previous price collapse. Breakeven levels are much lower and company debts are more manageable.

Gammell points out that commitments to major capital projects are much lower than they were in 2015, and short-cycle spending that can be cut rapidly represents a much higher share of capital budgets. Rather than panic and dramatically attempt to offload low-value assets, the majors will most likely employ their strong liquidity and wait out the crisis.

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