Discipline, Baby, Discipline! Big Oil Resists the Urge to Spend

Forget “Drill, baby, drill!” The world’s biggest oil companies aren’t returning to their spendthrift ways, despite crude’s recovery.

Equinor ASA and ConocoPhillips kicked off the earnings season for the energy majors on Thursday with an emphasis on restraint despite reporting their highest profits in four years, a possible indication of what to expect from the rest of the industry.

Analysts are forecasting record cash flows for crude drillers after oil prices surged, prompting fears the industry would return to lavish spending. Morgan Stanley last week said that the 46 percent advance in international oil prices from the third quarter of 2017 will fuel the biggest profit jump since prices began to crash in 2014.

Equinor Chief Executive Officer Eldar Saetre pledged to keep a sharp focus on costs as the market recovers. His words were met by actions as the company trimmed its 2018 budget by 9.1 percent to $10 billion, even as cash flow surged.

ConocoPhillips, the largest independent explorer, disclosed results that trounced analysts’ estimates, but Chief Executive Officer Ryan Lance said on an earnings conference call it’s being “laser-focused on discipline.”

Conoco raised its full-year spending estimate 1.7 percent to $6.1 billion, citing decisions outside the company’s control such as drilling partners expanding operations. The Houston-based explorer handed almost $1 billion back to shareholders, part of a $9 billion expansion of buybacks announced in July.

For 2019, Conoco expects capital spending to be roughly in line with this year’s drilling budget. Lance said that after years of cost-cutting and efficiency gains following the price crash, Conoco’s profits are back where they were in 2014, when Brent was closer to $100 a barrel. Brent traded at around $77 Thursday.

Clear Priorities

Other oil majors will show in the coming days whether they’re taking the same approach. Total SA and Eni SpA are due to report Friday, followed by Exxon Mobil Corp., BP Plc and Chevron Corp. next week.

There are plenty of reasons to stay cautious in a market that remains uncertain and volatile. Since Brent’s rally to $86 a barrel earlier this month, it’s dropped due to concerns over demand. Plus, there’s a tendency for prices for equipment and services to rise as higher prices spur more activity, Equinor’s Saetre said.

Conserving Cash

“What costs will look like in a stronger market is very important for investors,” he said in an interview after the company’s earnings presentation in Oslo. “You can’t have one culture when prices are low and another culture when prices are high. You need to build a culture that takes us through these cycles.”

Major oil companies were forced to slash expenses during the deepest industry downturn in a generation, with international oil prices dipping close to $27 a barrel in 2016. That slump appears to be over after crude’s recent gains amid supply threats across the globe.

“We continue to take good care of our cash,” Saetre said in a Bloomberg television interview. “We’d also like to see a strengthening of our balance sheet.”

Conoco shares rose 4.1 percent to $68.37 at 2:46 p.m. in New York trading. Equinor was almost unchanged at 214.2 kroner at the close in Oslo.