Oil Firms To Keep Spending Tight Despite High Prices

November 19, 1999

The absence of quality new merger opportunities will force oil companies to keep spending tight even though this year's oil price recovery has given them far more cash to work with, analysts said. Oil companies are now locked into the regime of tighter financial discipline they promised share investors during last year's crash, and will be unable to embark on the usual rush for production growth as the market recovers, they added. "The pendulum cannot swing quickly back and capital spending is not going to rebound," Fergus Macleod of Deutsche Bank said. "Oil companies have got to deliver on the agenda they set themselves. The market is very unforgiving of failure." Fears of losing equity confidence mean oil companies will take around two years to raise spending in pursuit of market share left open by OPEC producers' supply cuts, he added. Companies must now look even more closely at their own operations to enhance rate of return as the big savings generated by huge mergers like Exxon/Mobil, BP Amoco and TotalFina were no longer on offer. The 15-month merger drive has focused on companies bumping up their oil reserve book by absorbing smaller rivals to make up for the slower rate across the industry of finding big new fields. "There are not a lot of those opportunities left," said John McCormack of Stern Stewart in New York. "The easy, low-lying fruit has been substantially picked." Restraint now will break's oil sector's habit of spending too much when times were good, said McCormack. "The industry has never been able to manage the upside," he said. This time it should use the new rush of capital to reduce debt or carrying out share buybacks, Macleod said. "I would expect a massive increase in share buybacks," he said. "Exxon have been good at doing this, creating a shortage in their own equity and generating a higher valuation for the stock." Internet Is The 'Holy Grail' The oil sector must also embrace the telecommunications revolution if firms are to build successful new business models in the new world of tighter budgets and investor power, the analysts added. "Whether the change will come or not is not open to question. It's whether oil companies can seize it," said Edward Morse of Hess Trading. "E-commerce allows companies to control the supply chain, for example. It eliminates the middlemen between vendor and customer." "That's the holy grail," said Robert Maguire of Morgan Stanley Dean Witter. "Finding the Internet angle." - (Andrew Mitchell, Reuters)

Oil Firms To Keep Spending Tight Despite High Prices

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