As the sell-off in the broader stock markets intensifies, it will be bad news for the world’s largest oil companies. Why? Because cracks are already beginning to appear in the biggest and most profitable global oil companies. While rising costs and higher debt levels have been plaguing the U.S. shale oil industry, these negative factors are now impacting the major oil companies as well.
When the oil price fell below $100 in 2014, it spelled doom for the U.S. and global oil industry. As oil prices continued to decline, energy companies were forced to increase their debt and reduce their capital expenditures (CAPEX). Cutting CAPEX spending while adding debt aren’t a good recipe for positive financial earning in the future.
According to several energy analysts, they believe 2018 will be a turnaround year for the major oil companies. Unfortunately, the fate of the price of petroleum and the oil companies are tied to the broader markets. When the markets rise, it’s good for the oil price and energy companies, and when the markets fall, then the opposite is true. However, the next major market selloff will likely cause irreversible damage to the global oil industry.
Investors need to realize that the global oil industry required $120+ oil in 2013 to replace reserves and bring on more oil production. When that price level was not obtained that year, oil companies began to cut CAPEX spending even before the price fell below $100 a barrel in 2014. Today, with the price of oil trading at $64, it is approximately half of what the global oil industry requires to fund new production growth.
So, there lies the rub. Even though oil companies are more profitable currently, it was achieved by destroying future production. As we can see in the chart below, CAPEX spending in eight of the largest global oil companies fell 56% from $245 billion in 2013 to $109 billion in 2017:
Yes, it’s true that a lower oil price forces oil companies to cut CAPEX spending to remain profitable, but it will also negatively impact their earnings in the future. While all the major oil companies cut their CAPEX spending significantly over the past four years, Brazil’s Petrobras and ConocoPhillips both reduced it the most by 70%.