LONDON (ShareCast) - (ShareCast News) - The world's oil majors have made substantial progress in boosting their ability to make profits even in a low oil price environment, but low prices were set to strain their finances again over the short-term, according to Macquarie.
On average, falls in the price of oil would cut their combined cash-flows by 4% in 2017, 9% in 2018 and 10% in 2019, the broker's analysts said.

After slashing their capital and operating budgets, the largest oil producers could cover the cost of their investment and cash dividends at a price for Brent of $50 a barrel, even as they began to reduce debt.

Yet with prices skidding below that level, it was unlikely that "optimistic" scenario could be maintained in 2018 and 2019, although their dividends would be safe as long as the oil price did not fall below $40 a barrel.

Having said that, scrip would probably continue to be used as an alternative to cash dividends.

Against that backdrop, they downgraded their recommendation on Royal Dutch Shell B (target cut from 2,400p to 2,150p), Eni (target cut from €16.0 to €14.0), Repsol (target cut from €15.8 to €14.3) and Chevron to 'neutral' (target cut from $125 to $105), while BP (target cut from 440p to 400p) was cut to 'underperform'.

Only Total (target kept at €50) and Galp (target lowered from €16.6 to €15.9) were kept at 'outperform'.

At $38 post disposals, Total had the lowest organic oil price break-even in 2017 within its large-cap peer group, they said. It also had "significant" growth options in its pre-FID portfolio.

Galp was headed in the same direction thanks to its exposure to some of the lowest break-even offshore oil projects.

After 2018, Galp would have one of the lowest free-cash-flow break-evens (after dividend) at sub-$40 a barrel.

The backdrop

In a separate research note released overnight, analysts at the Australian broker lowered their projections for the price of Brent oil from $55.75 and $60.63 to $49.33 and $52.75, respectively.

They also marked down their long-term price assumption for Brent from $70.0 to $65.0.

The impact of increased US shale oil output was set to outweigh OPEC's cuts from the end of 2017 onwards.

In a rather glum assessment of the outlook, they told clients that: "the reality is even the most optimal of OPEC's potential strategies probably will not work."

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