As oil prices remain low, oil and gas companies around the world are beginning to worry about their cash flow. According to The Wall Street Journal, companies are faced with the decision of whether they will cut costs.
Companies considering this dilemma are concerned with consequences at both ends of the scale. However, too much cost cutting can result in lost growth, which will hurt bottom lines when prices finally begin to bounce back. On the other hand, not enough cost reductions can actually decrease revenue in the near term, potentially impacting dividend payouts to investors.
It is a tough decision - one that France's major oil and gas company and second largest in Europe, Total SA, recently tackled. The company's decision focused on their investors, according to Bloomberg. By cutting costs, Total predicts they won't have to lower their payouts and will avoid going into debt at the same time.
"We are preparing the group to face low oil prices for a long time," Patrick de la Chevardiere, Total's chief financial officer told Bloomberg. "We don't want to be the first group to cut the dividend."
The Wall Street Journal reported Total will cut about 200,000 barrels of oil per day in 2017. The company also plans to incrementally decrease spending over the next few years. This year, the company spent $24 billion, but plans to spend no more than $21 billion in 2016 and $19 billion in 2017.
De la Chevardiere told The Wall Street Journal he expects Total to be able to pay the dividends' full amounts in 2017, even with oil at $60 a barrel. Furthermore, he predicts the company should be able to break even in 2019 if oil continues to drop to $45 a barrel.
OPEC could slow down, too
According to World Oil, Total isn't the only one cutting back on production. The Abu Dhabi National Oil Co. will be at least a year behind schedule in its plan to grow production to 3.5 million barrels per day. The United Arab Emirates now predicts by the end of 2017, production will rise to 3.4 million barrels per day. Plus, the company's expansion could be pushed back as late as 2019.
However, Ole Hansen, head of commodity strategy at Saxo Bank in Copenhagen, told World Oil he is not surprised ADNOC is holding back on its expansion.
"One of the richest oil nations out there is in no hurry to speed up production, instead opting to keep it in the ground for a later date," Hansen told World Oil. "With Iraq and Saudi Arabia beefing up production, I don't think a reduction from Abu Dhabi would have that big an effect at this stage."
According to Reuters, other OPEC countries are likely to reduce production, too. Currently, the Organization of Petroleum Exporting Countries is producing 31 million barrels per day. However, as global demand decreases, OPEC could be forced to cut production to 28.2 million barrels per day in 2017.
If OPEC and non-OPEC countries continue to produce oil at their current rates, prices aren't likely to rise in the next few years.