Big Oil Learning to Live With $50 Crude

Big Oil is starting to beat the crude-market slump, as the industry rediscovers how to make money at lower prices.

Exxon Mobil Corp. and Royal Dutch Shell Plc are forecast to more than double second-quarter profit from a year earlier, far outstripping the 8% gain in benchmark Brent crude, according to analyst estimates compiled by Bloomberg.

Chevron Corp. will return to profit, while France’s Total SA is expected to report a third consecutive quarter of higher year-on-year earnings.

Oil majors are learning to live with $50 crude, with most CEOs focused on remaining profitable through a downturn they expect to last until at least the end of the decade. Investors have yet to reward the producers’ cost-cutting efforts—with the energy sector the worst performer in the MSCI World Index—but that may change as cash flows strengthen, according to investment-management firm Sanford C. Bernstein.

“We have to remain very disciplined about spending and not assume that the price will go up,” BP Plc Chief Executive Officer Bob Dudley said this month in Istanbul. “The years of $100 oil will turn out to be an aberration. We used to make money at $40 oil; we used to make money at $25 oil.”

Europe’s seven-biggest oil companies together generated 42% more cash in the second quarter than a year earlier, easily enough to cover cash dividends and capital expenditure, Bernstein analyst, Oswald Clint, wrote in a July 19 report.

Clint, who assumes an oil price of $50 a barrel for this year and 2018, said over the next two to three quarters, producers should generate enough cash to also phase out dividends paid as shares.

Total, Europe’s second-biggest oil company, can cover the cash part of its dividend at $50 oil this year, according to Bloomberg Intelligence data. Exxon and Shell covered their payout with cash from operations in the first quarter at an average price for Brent of just under $55.

BP, which did not generate enough money to cover the payout in the three months to March, will be able to do so this year if oil is between $50 and $55, chief financial officer, Brian Gilvary, said in May.

Despite cutting billions of dollars of capital expenditure, the producers are now proceeding with projects they began before the downturn, including BP in the North Sea and Eni SpA in Africa.

The industry is expected to increase spending “modestly” in oil and gas exploration and production projects this year after a 44% plunge between 2014 and 2016, the International Energy Agency said this month.