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Morgan Stanley cuts big-oil output estimate on lower spending

[LONDON] Global oil production next year will be about a half-million barrels a day lower than estimated following billions of dollars of spending cuts by some of the world's biggest energy companies, Morgan Stanley said.

Project cancellations or delays mean the combined oil output of Eni SpA, BP Plc, Total SA, Statoil SA, Exxon Mobil Corp and Chevron Corp will be 530,000 barrels a day below earlier estimates next year and 1.2 million a day lower in 2020, the banks said. These companies account for about 13 per cent of global output.

A global oil surplus of as much as 3 million barrels a day drove oil prices to a six-year low. The industry has hunkered down to endure the slump, with Wood Mackenzie Ltd. estimating companies have canceled or delayed US$200 billion of projects since the middle of 2014 and eliminated thousands of jobs. The cuts, aimed at preserving dividends and reducing debt, will help reduce the surplus, according to Morgan Stanley.

"We are forecasting meaningfully lower oil production," Morgan Stanley analysts led by Martijn Rats wrote in a report dated Monday. "Upstream capex has been reduced significantly, and this has not been without consequence: A large number of projects have already been canceled or delayed."

Brent crude, the global benchmark, dropped to a six-year low of $42.23 a barrel on Aug 24, down from more than $100 a barrel a year ago. While prices subsequently rebounded to trade at $51.81 at 1:50 pm on the London-based ICE Futures Europe exchange Tuesday, they remain about 50 per cent lower than a year-earlier.

The outlook for oil prices suggests that the six companies will announce further reductions to planned spending over the next few months, Morgan Stanley said. This would bring the peak- to-trough reduction in capital expenditure from 2014 to 2017 to about 31 per cent, "similar to the majors' reduction in capex following the 1986 oil price collapse," the bank said.

BP has said it will spend less than US$20 billion this year compared with initial plans for US$26 billion. Norway's Statoil reduced its spending forecast for this year by US$500 million to US$17.5 billion after crude prices resumed their decline. Royal Dutch Shell Plc has "more levers to pull" should the market weaken further, after already making a cut of 20 per cent, Chief Executive Officer Ben Van Beurden said July 30.

It will be a few years before the capital expenditure cuts will result in enough lower production to significantly reduce the current oil surplus, according to accounting firm BDO International.

"The cuts in capex will start affecting production at least two years out, if not longer," Simon Leathers, director of BDO's UK Merger & Acquisitions, said by phone Tuesday.

That is showing in the companies' share prices. Chevron has dropped 28 per cent in New York trading this year and Shell's B shares, the most widely traded, are 26 per cent lower in London. Exxon is down 19 per cent, BP 15 per cent and Total 4.2 per cent.

The share prices of most oil companies' suggest investors are now factoring in dividend cuts of 15 per cent to 25 per cent, according to Morgan Stanley.


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