What's Causing European Oil Majors So Much Pain?

A slew of European oil majors reported weak production and profits in 2013. Companies including Eni (NYSE: E  ) , Royal Dutch Shell (NYSE: RDS-B  ) , and Statoil (NYSE: STO  ) are encountering difficulties in keeping production growth going in the right direction. They're suffering from a variety of issues, the most prominent of which are ongoing security challenges in the Middle East and Africa that are causing supply disruptions.

Going forward, investors should temper their expectations. Not only are those overseas supply disruptions expected to remain for the foreseeable future, but harsh cuts to capital expenditures will place an even greater strain on production in the months ahead.

Supply disruptions overseas
Eni and Royal Dutch Shell are each going through a very difficult situation in Nigeria. Both companies have highlighted the escalating security challenges in their Nigerian operations as cause for concern. In addition, Eni is suffering from labor disputes and other problems in Libya. This is particularly troubling for Eni, since it's the biggest oil producer in Libya. Royal Dutch Shell has reported oil thefts in Nigeria, which is casting a dark cloud over the company's near-term outlook.

All told, the security challenges in the Middle East and Africa are having a significant effect on output. Eni produced 1.58 million barrels of oil per day in the fourth quarter, compared to 1.75 million barrels of oil per day in the same quarter last year. That amounts to a nearly 10% decline. Royal Dutch Shell's total production of barrels of oil equivalent fell 5% in the fourth quarter, year over year.

This casts doubt on whether the companies can hit their production targets, since they generate more production from international operations than they do in North America. Further complicating matters are the aggressive cost cuts they have planned this year and next.

European majors cut spending, increase cash returns
Eni, Royal Dutch Shell, and Statoil are laying out extremely similar plans over the next few years. Each company has notified investors that they'll be enacting strict discipline over capital expenditures. In addition, they intend to keep raising cash from divestitures.

Eni will reduce its spending over the next four years by 5% per year. Shell's planned cuts are even harsher. It will reduce capital expenditures to around $37 billion this year, down from $46 billion the year before. In percentage terms, that represents a nearly 20% decline. Statoil's management intends to cut spending by more than $5 billion from 2014 to 2016 as compared to previous plans.

To smooth things over with investors who fear these harsh cuts will come at a severe cost to future growth, these majors are going to increase cash returns to shareholders.

Eni, Royal Dutch Shell, and Statoil have each stated their intentions to raise dividends in the upcoming years. Eni plans to increase its dividend by roughly 2% this year and in 2015. Shell expects to bump up its own payout by 4%. Statoil plans to pay two quarterly dividends in addition to its regularly scheduled annual payout next year.

While increased dividends look great on the surface, they're a short-term fix to calm their investors' fears. Questions surrounding their long-term growth should take precedent over small increases in their dividend payments.

Investors should question growth potential
European majors Eni, Royal Dutch Shell, and Statoil are each planning to aggressively cut costs and sell off assets to raise cash. Eni expects to generate 9 billion euros from disposals. Shell is even more aggressive, since it wants to raise as much as $15 billion by the end of 2015. For its part, Statoil has divested $18 billion of assets since 2010.

This means that each of these companies is a slimmed-down version of their former selves. Their focus on capital discipline is admirable, and investors are likely pleased to receive higher cash dividends going forward. However, maintaining capital expenditures is necessary for oil and gas companies to keep growing. In other words, their future growth may not reach expectations. Each company expects to deliver production growth in the low-to-mid single digits over the long term, but they will have to maximize their existing projects in order to reach their goals.

You shouldn't cut back on investing like these companies

Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal-finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2842804, ~/Articles/ArticleHandler.aspx, 8/28/2015 5:29:41 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Bob Ciura

Bob Ciura, MBA, has written for The Motley Fool since 2012. I focus on energy, consumer goods, and technology. I look for growth at a reasonable price, with a particular fondness for market-beating dividend yields.

Today's Market

updated 8 hours ago Sponsored by:
DOW 16,654.77 369.26 2.27%
S&P 500 1,987.66 47.15 2.43%
NASD 4,812.71 115.17 2.45%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/27/2015 4:02 PM
E $32.40 Up +1.29 +4.15%
Eni S.p.A. (ADR) CAPS Rating: ***
RDS-B $51.96 Up +2.24 +4.51%
Royal Dutch Shell CAPS Rating: ****
STO $15.15 Up +0.70 +4.84%
Statoil (ADR) CAPS Rating: ****