Majors: Can a value-over-volume strategy pay off?

As the pressure mounts on oil companies to improve shareholder returns, we screen future capital expenditure and rank new projects by returns to assess the future options to tighten capital discipline

After a decade of disappointing production and declining returns on upstream investment, the Majors must now weigh up the relative merits of 'value over volume' as they consider their capital allocation.

Their choice is not a simple one - to satisfy the call from investors for greater dividends, each company must decide whether to continue to invest in a broad range of projects for the long term or scale back investment to free up free cash flow.

Using our analysis of individual projects around the world, we have identified US$1 trillion of global discretionary spend. As the regions most dominated by the Majors, Europe and Africa are under the greatest scrutiny as the peer group continues to tighten capital discipline.

Discretionary Spend Map

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Finding the right balance between maximising returns in the short run with the strategic need for continued investment to sustain the business will be key. If the Majors scrapped pre-FID projects with an IRR of less than 15%, we estimate that US $30-35 billion of annual capex could be deferred at peak. Cutting these investments would lift average new project returns by 3-4% across the Majors.

But this would reduce production for the peer group by 2.5 million boed or 13% in 2025. Eni, Statoil and Chevron have the highest proportion of uncommitted capital expenditure and all three have already started to push back marginal projects.

If we include capital expenditure savings from low return projects, dividends would receive a boost of 40 to 50%. Although this is an extreme (and unlikely) outcome, we certainly expect more focus on shareholder returns to emerge throughout 2014.

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Majors: Value Versus Volume – A Difficult Balancing Act [Subscription required]

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Our unique upstream research, with cash flow models for oil and gas fields around the world, drives this picture of companies’ spending plans. Our corporate analysis can help you understand, compare and challenge corporate viewpoints and trends. From mergers and acquisitions through to industry benchmarking, our independent, unbiased and comprehensive corporate data and analysis give insight into the key players in the energy, metals and mining industries. 

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