Shell Gets Shelled - Oil Majors Still in Flux

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The share price of Royal Dutch Shell (LSE:RDSA) got shelled today on the London Exchange, falling 1.52% (-26.50) to 1,711.50 after publishing a less than glorious third quarter earnings report. In addition to report a loss in excess of $7.4 billion ($6.1 billion based on current cost of supplies), Shell’s cash flow from operating activities fell from $12.8 billion in Q3 2014 to $11.2 billion.

In the meantime, U.S. major, ConocoPhillips (NYSE:COP) posted a net third quarter loss of $1.1 billion. During Q3 2014 the company returned a profit of $2.7 billion.

Oil companies around the world continue to adjust to the continuing impact of the price of crude oil hovering below $50 per barrel. The price per barrel declined today by 1.26% to $48.58.

We are approaching the anniversary of OPEC’s decision to let the price of oil seek its own level. Back at the close of 2014 and the beginning of 2015 many were speculating (and still are) about when the price of oil will climb back to over $100 per barrel. Apparently, the OPEC nations understood something that the rest of the world did not. They are playing for the long term. Market gurus continue to be, for the most part, very short-sighted.

Shell and Conoco are not trying to manage the price of oil. They are trying to manage their companies to cope with the price of oil. They know, and the OPEC nations know, that changes can be strategized within days, but the actual changes take long periods of time to be implemented. Feeling the positive impact of implemented changes can take longer yet.

The actions of both company can be summed up in the subtitle of ConocoPhillips SEC filing: “Accelerating Capital and Operating Cost Reductions.”

Ryan Lance, Chairman and CEO of ConocoPhillips explained that, “We are accelerating actions to position our company for low and volatile prices, while improving the underlying performance of the business.

Shell’s CEO, Ben van Beurden, noted that, “The reality of the day is that we don’t know when and how this will balance out. We don’t even know if it really stabilizes. If you have a high degree of uncertainty over the oil price, you have to have projects that are very resilient.” Or you have to shut down some projects completely.

Shell is doing exactly that, while it focuses on its deep waters and liquefied natural gas projects. Van Beurden gave an indication of the dramatic actions that Shell is considering when he noted that he would be willing to abandon it Alaskan Arctic and it Canadian oil-sands project – into both of which the company has already invested billions of dollars. Lance noted that ConocoPhillips would be, “dramatically lowering our cost structure and divesting assets that do not compete for funding in our portfolio.”

In all, seven of the top twenty major European and American oil companies have posted third quarter losses, with only half of them reporting at this point.

Investors should be keenly aware that, give the “lower for longer” pricing expectations, these financial reports are the results of the oil companies making some of the major operational changes they have had to make, the cost inevitably lagging behind the changes.

Since the changes do not appear to be complete, investors should be keeping their eyes on balance sheets – the place that will reveal the long-term ability to sustain the impact of the changes already made and that need to be made.

Equity investors should not be worried about the price of oil, but rather their ability of the oil majors to withstand a long-term low price and their ability to turn the ship around in the face of an increase in price.

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