* Oil investment growth slows sharply
* Onshore investments seen hurting most
* Ultra-deepwater segment seen best placed for growth
By Henrik Stolen, Gwladys Fouche and Balazs Koranyi
OSLO, Sept 5 Oil and gas firms are cutting back
on investments to try and improve profits and save cash for
dividends, perhaps signalling an end to a decade-long boom in
Companies seeking to bring oil fields into production have
splashed out on new drilling, equipment or pipelines, supported
by rising oil prices.
But suppliers and analysts expect investment growth to slow
sharply this year and in 2014, in line with a projected fall in
oil prices. The spending boom has squeezed budgets and forced
companies to sell assets and issue debt to pay dividends.
Onshore spending will be hurt the most, including the
saturated U.S. shale segment. New ultradeep markets, such as
Brazil, West Africa and Mexico, will still flourish, however, as
they offer the rare opportunities for big finds.
"Oil firms have a dilemma: They still need to grow their
production, which is virtually flat and even declining, so they
have to spend but will have to become much more selective,"
Magnus Lundetrae, the chief financial officer of Seadrill
, the world's biggest offshore rig operator said.
"In total they'll spend around $700 billion (this) year...I
expect spending to be flat (from next year) ... with onshore
declining and offset by deepwater."
Many companies prefer to quietly delay projects but there
have been a few high profile casualties already this year
including Statoil delaying its $15 billion Johan
Castberg project in Norway's Arctic and BP reconsidering
its $10 billion Mad Dog project in the U.S. Gulf of Mexico.
Nordic bank SEB, a major lender to the sector, has cut its
estimate of exploration and production spending from a rise of
12 percent this year, broadly in line with 2012, to 7 percent
this year and 4 percent next year.
Deutsche Bank said growth could be even lower, falling to 5
percent this year and 1 percent next year. Norway said on
Thursday it expects capital spending in its offshore market to
rise just 1 percent next year after growing 18 percent in 2012.
"A balanced oil market with stable to slightly lower oil
prices, rapid growth in U.S. tight oil production and lower free
cash flow have a dampening effect on budgets," SEB analyst Terje
Capital spending has grown by more than 10 percent a year
since 2003 and oil prices have risen nearly four-fold to $115
per barrel but energy firms have not reaped major benefits
because they have not become more efficient, analysts say.
Their return on average capital employed, a measure that
shows profitability on investments, fell from over 15 percent
six years ago to just 9 percent now, analysts say.
Credit Suisse estimates that capital spending per barrel
rose by around 14 percent between 2005 and 2012 while production
is expected to rise just over 1 percent this year and next.
Spending is so high that cash flow from operations cannot
cover dividends so the net cash flow has been negative since
2009 and expected to stay in the red for several more years.
"The oil price has not boosted earnings in the exploration
and production sector. Oil companies make money but not as much
as expected," Ole Henrik Bjoerge, the CEO of brokerage Pareto
said. "The largest oil companies have no free cash flow in 2013.
Their cash flow is the worst in the last four years."
Shares have also suffered as oil and gas stocks
underperformed the broader market by over 25 percent since the
start of 2012 as profits fell, cash flow declined and the
sector's return on investment fell, analysts said.
Major oil companies trade at a price to 2014 earning ratio
of 8.9, below their own long term average, while Shell
and BP both trade at about 1.1 times their book value,
both among the lowest on the FTSE 100.
"What has happened over the past year, is that a certain
number of projects, for various reasons, were no longer
economically profitable for our clients," Thierry Pilenko, the
CEO of French oil services group Technip said. "Some
of them were because of costs increase that were not taken into
account, but were real, like the Australian projects."
Woodside Petroleum this year shelved its $45
billion Browse LNG plant off Australia due to rising costs.
Seismic explorers, considered bellwethers in the industry
because they gauge exploration appetite, have warned recently
that energy firms are pushing out contract awards, delaying
spending, moving some projects into next year to reduce budgets.
Shares in seismic firm EMGS tumbled 32 percent
over the past 3 months while Polarcus is down 25
percent and TGS fell 10 percent.
"There are warning signals," Oeyvind Eriksen, the acting CEO
of oil services group Aker Solutions said. "It is a
combination of a stable oil price and increased costs and that
puts pressure on net cash flow. Projects that were profitable in
the past become marginal today."
Technip's Pilenko says another major issue is that there are
fewer mega projects around and oil firms are struggling to
adjust to the smaller scale, resulting in some cost blowouts.
The ultradeep market is likely to be one of the few bright
spots in the next few years because it offers the chance of
large finds. Charter rates for deepwater rigs are holding steady
at around $600,000 a day, near their historic high.