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The largest oil and gas companies are employing different strategies to weather the downturn and plan for the future. Each strategy has its risks, and not all may work out. Which companies will emerge stronger after an oil price rebound and which will fall further behind because of bad decisions?
There are different ways to play a down cycle. With oil prices half of what they were in 2014, revenues are significantly lower for everyone across the board. As a result, the oil industry has collectively implemented an estimated $114 billion in spending cuts. But oil executives are also trying to figure out how to grow over the next five or ten years.
A few of them are trying to look past the period of low prices by pursuing big, long-term projects that have stable and long-term returns. That means more offshore oil and/or LNG, both of which have longer shelf-lives than shale.
French oil giant Total SA (NYSE:TOT) plans on buying up assets in LNG and offshore oil. "We are second to none on deep offshore and LNG and we have a clear strategy to keep and reinforce these strong points," Yves-Louis Darricarrere, Total's upstream president, said at a conference on April 22. It already has LNG assets in Australia and Papua New Guinea (it announced on April 22 that first shipments from its Papua New Guinea LNG project will begin in 2021) and is likely looking for more. Total has already undergone a major divestment campaign to shed assets that it feels are not suited for growth. Having whittled down its size, it is clearly eyeing acquisitions.
"It's a bit early for me," Total's CEO Patrick Pouyanne said, providing a bit of insight on Total's strategy. "The opportunities will really come if oil prices remain low over a longer period. Then you will see real opportunities for major companies like Total."
While it may take some time, Total appears to be charting a course similar to that of Royal Dutch Shell (NYSE:RDS-A) (NYSE:RDS-B), although perhaps on a smaller scale. Shell made a big splash by agreeing to pay $70 billion to purchase BG Group, the largest purchase in a decade. The move is a big bet on the future of LNG as BG Group adds several LNG-producing assets to Shell's portfolio, particularly in Australia. It also will provide Shell with offshore oil fields off the coast of Brazil. In order to finance the deal, Shell will have to sell off some of its other possessions, leaving the yet-to-be-formed Shell-BG company comparatively more invested in LNG and offshore oil.
ConocoPhillips (NYSE:COP) is pursuing the opposite approach. Viewing LNG and offshore oil as costly and inflexible -- since they require huge sums and take many years to develop -- ConocoPhillips is instead doubling down on shale. The firm will slash spending by 28 percent over the next three years to weather the downturn. But beneath that headline number is an interesting pivot toward shale. ConocoPhillips will cut spending on expensive conventional projects by 45 percent, but increase spending on shale production by 50 percent. When all is said and done, ConocoPhillips will be heavily leveraged on shale.
BP (NYSE:BP) may not have a lot of options for growth. Still reeling from a ballooning price tag for the Deepwater Horizon incident, BP is now a much smaller company than it was a few years ago. It had to sell off about a third of its assets to pay for the all the troubles stemming from the 2010 disaster. Now, with the oil price downturn, BP is being forced to sell more. BP has announced that it is planning on selling off $2 billion in pipelines and storage facilities, in order to raise cash. It also announced that it is selling four oil fields in Alaska to Hilcorp, also in an effort to shrink its footprint and raise funds. Without the firepower to take over any companies of its own, BP has had to fend off rumors that a larger shark out there -- ExxonMobil (NYSE:XOM) or Chevron (NYSE:CVX) -- is considering swallowing up BP.
The big question mark is what ExxonMobil will do next. The largest private oil company in the world, ExxonMobil has a lot of resources to throw around should it choose to do so. In the wake of the Shell purchase of BG, everyone is watching ExxonMobil's next move. However, after having overpaid for XTO Energy in 2009, ExxonMobil will probably be a bit more cautious. And since the company's CEO thinks that oil prices will remain low for a few more years, there is plenty of time to make a move. Waiting would have the added benefit of allowing ExxonMobil to snatch up companies at a cheaper price if oil prices do in fact stay low.
It is too early to tell which of these companies is taking the smartest approach. Time will tell.
By Nick Cunningham of Oilprice.com. Oilprice has no position in any stocks mentioned. The Motley Fool recommends Chevron and Total (ADR). The Motley Fool owns shares of ExxonMobil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.