It had to happen eventually. At the end of November, Saudi Arabia gave in and brokered the supply cut agreement that finally signalled an end to two-and-a-half years of bloodletting in the global oil sector. The arrangement – which curtails Opec and Russian production to the tune of 1.8m barrels a day – in a sense marks the end of an overdue period of industry rehabilitation, a boot camp that may just have created a more investable sector.
Indebted they remain, but London’s integrated giants Royal Dutch Shell (RDSB) and BP (BP.) emerge from the rout with a renewed understanding of the importance of cash flows and costs. As demonstrated by short-seller Jim Chanos, there is a convincing case that the oil majors lost sight of these essential planks of any business model in the years when a barrel of oil fetched triple figures. Testament to this is Shell’s promise that it can make more cash at $60 (£49) now than it did when oil was at $90. For a company whose dividend yield very recently stood at more than 7 per cent, and whose relevance is predicated on such shareholder returns, that is an important and necessary commitment.
Analysts at HSBC recently cited $60 oil as the point at which the majors effectively become free-cash neutral, in a clear sign of the cuts that have been made to operating and capital expenditure in the past three years. This should reach its lowest point in 2017, just as supply tightens, although final investment decisions are likely to creep back as unproductive capital is put back to work. One would expect that the industry’s recent pain is simply too fresh for projects to be sanctioned on anything but a highly economical basis. Cancellations to both Arctic and deepwater drilling projects suggests boardrooms have started to think straight again.