Oil majors may need deeper cuts to oil and gas exploration and production spending as they grapple with an extended period of low crude prices.

The industry is expected to reveal another set of grim earnings for the first quarter when benchmark Brent prices averaged $55 a barrel, almost half the level of a year ago.

Exxon Mobil Corp., Royal Dutch Shell, BP and France's Total have already responded by cutting 2015 capital spending by 10 to 15 percent, delaying and scrapping projects and cutting operating costs.

And despite a sense among some industry executives that oil prices may have hit their 2015 lows following a decline in U.S. shale production, more cuts may be needed.

Exxon, the world's biggest listed oil company, has reduced 2015 capital spending by 12 percent to $34 billion.

"We'll see throughout the year whether we stay there (capex) or not, we're seeing a lot of cost efficiencies," chief executive Rex Tillerson said at the IHS CERAWeek conference.

Analysts at HSBC singled out BP, Chevron, Statoil and Total for having "management aggressively looking to exploit this period to improve long-term returns."

"Some of the companies now view the current environment not as a threat, but as the best opportunity for a re-set of project economics in well over 10 years," HSBC said in a note.

"As a result, we think the capex reductions we are seeing this year are likely to be only the start."

The savings announced in recent months are already improving balance sheets.

According to analysts at Jefferies, oil majors today require an average oil price of $78 a barrel in order to cover investments and dividends from organic cash flows, down from $90 a barrel in early 2015.

Oil companies are not expected to cover dividends through organic cashflow (excluding acquisitions) until 2017, according to Jefferies.

DIVIDENDS SAFE

The seven oil global majors are forecast to report a year-on-year decline in income of around 57 percent, while earnings per share are set to decline by about 27 percent, according to Jefferies

Despite the expected drop in revenues, analysts expect most oil majors are likely to maintain dividend payouts to investors after increasing borrowing to a record $31 billion of debt in early 2015.

Eni is the only oil major to have cut dividends. BP, Total and Shell have vowed to maintain their annual payouts, while BP and Total are also offering scrip dividends, which allow investors to buy shares at a reduced price instead of receiving the dividend.

The lower average oil price during the quarter looks set to be offset, like in the previous two quarters, by a stellar rise in profits from refining as global demand for oil products such as gasoline and diesel surged as a result of lower prices.

Morgan Stanley's top picks in the sector are Total and Statoil due to big pipeline of project startups and their ability to implement further spending cuts.

Several analysts downgraded Shell's valuation following the Anglo-Dutch firm's move to buy smaller rival BG Group for around $70 billion.

Source: www.reuters.com

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