Oil groups face up to lower crude oil prices

Oil groups face up to lower crude oil prices with the latest company financial results. All seven of the world's largest private-sector oil groups report half-year results this week, starting with BPtomorrow, and the main focus for investors is likely to be on the companies' success cutting costs.

Oil company chief executives were clear that they never believed oil would stay at record levels above $100 per barrel seen last year. Even so, the plunge from more than $147 at the peak to less than $70 today has revealed that most of the big companies were operating with capital spending plans, distributions to shareholders and cost structures - the result of soaring prices for oil industry equipment and services - that were unsustainable at the level of oil prices seen this year.

As Neil McMahon of -Sanford Bernstein, the investment group, puts it: "Because of the recent -climate, present day commodity price levels simply do not allow the oil majors to continue to grow the business and pay substantial shareholder returns. This quarter looks set to be a competition of who can cut costs the best."

By that yardstick, BP may be seen as outdoing the rest of the group because it began its cost-cutting drive in 2007, when the oil price was still rising.

Its second-quarter profits are expected to be about $2.8bn, down roughly two-thirds from the equivalent period of 2008.

Aside from ConocoPhillips, which reports on Wednesday, BP is the only one of the large companies to have published a target for job cuts.

Royal Dutch Shell, which reports on Thursday, is at the start of a similar programme to BP's under Peter Voser, new chief executive. But its decline in profits is expected to be very similar to BP's, with a fall of about 70 per cent to $2.4bn.

ExxonMobil, the west's biggest oil company, which reports on the same day, argues that it has always kept costs on a tighter rein, meaning it has less need to focus on cuts.

Its earnings per share are expected to be down 57 per cent at 98 cents for the -second quarter, according to analysts surveyed by Bloomberg, but that will have been helped by the group's share buy-back -programme.

Exxon has persisted with buy-backs even as all its main rivals have abandoned them. As well as driving down costs, the big oil companies have curbed cash distribution.

Eni of Italy, which reports on Thursday, last month sold its Italian gas storage and distribution businesses to its 52.5 per cent owned subsidiary Snam Rete Gas for €4.5bn, and has put some North Sea assets up for sale.

The efforts are necessary because if the companies want to expand, they need to invest and, although they have been readily able to borrow money, their ability to raise finance is not unlimited.

The recovery in oil prices over the past two weeks is an encouraging sign for the industry's ability to fund investment plans.