Oil Stocks Tumble, 2015 Budgets in Spotlight as Crude Prices Fall 
 
By Justin Scheck, 
 
OPEC’s decision to stand pat on oil production despite a global glut is hurting prospects for U.S. energy companies and slamming countries whose budgets rely on high oil prices.

Though the Organization of the Petroleum Exporting Countries’ decision was widely expected, it knocked down U.S. benchmark oil prices 10% to $66.15 a barrel on Friday, the lowest level since September 2009, and sent shares in energy producers tumbling.

Among the hardest hit were U.S. domestic oil producers including Continental Resources Co., the biggest producer in North Dakota’s Bakken Shale. Its shares plunged on Friday nearly 20%, to $40.98.

 Exxon Mobil  Corp. fell 4.2%,  BP  PLC dropped 5.4% and  Royal Dutch Shell  PLC lost 7.3%, all in abbreviated New York trading on Friday.

Currencies of oil producing nations, including Russia, Nigeria and Canada, all weakened. Russia’s finance ministry said government spending would be revised or cut.

Benchmark Brent crude for January deliveries traded down $2.43 a barrel at $70.15 a barrel on Friday. That added to losses on Thursday, when Brent plunged 6.7%.

   ENLARGE  
 
.
Pascal Menges, a portfolio manager with Lombard Odier in Switzerland who has shares in U.S. shale oil producers, said OPEC’s decision “created a very uncomfortable situation” for oil companies that must decide whether to curb investments. He predicts the global oil oversupply will decline over the winter and U.S. production growth will slow, preventing prices from falling much more.

If that is the case, he said, the least-indebted North American shale companies should stay profitable. Still, he said, he has cut his fund’s investments in oil producers, moving some of the money to companies that buy and process oil.

Todd Staples, president of the Texas Oil & Gas Association, a trade group, said in a statement that low crude oil prices will impact some operations in the U.S., as well as globally. Still, he expects prices to eventually stabilize.

“We are confident the market will find an equilibrium,” he said.

Canadian oil-sands producers also are under pressure. The break-even price for oil-sands surface mines is among the most expensive in the world, at around $85 a barrel, according to  Bank of Nova Scotia . Operating costs at existing mines are less than half that amount. But the break-even point for so-called in situ projects, in which bitumen is heated and pumped up to the surface, range between $40 a barrel and $80 a barrel. Such projects represent the majority of future growth.

“We’re going to be more challenged by a high price environment than many other jurisdictions,” said Murray Edwards, chairman of  Canadian Natural Resources  Ltd. , one of Canada’s largest oil sands producers. “In the current price environment…you’ll to see a real muting, or reduction, or deferment of future oil sands projects,” Mr. Edwards said.

The immediate problem is rejiggering budgets originally built for the assumption of higher prices. For instance, BP Chief Executive Bob Dudley said last month that the company assumed oil prices of $80 a barrel when deciding whether to invest in its current projects.

A BP spokesman said the company continues to plan projects assuming a price of around $80 a barrel for “long-term investments which typically have lifespans of a decade or two.”

Russia also planned its 2015 budget assuming an average oil price of $100 a barrel. On Friday, its finance ministry said the government would revise or cut spending, calling an average of $80 per barrel over the next few years “a moderately optimistic scenario.”

The high oil price in recent years helped drive up costs for big players like BP and Shell. These giant companies now face the prospect of lower cash flow to fund those higher costs now locked into projects that will take years to complete. High costs from “the last two or three years are already baked into the contracts” for new projects, Shell Chief Financial Officer Simon Henry said last month.

A Shell spokesman said Friday the company’s “price screening range” for new projects is between $70 a barrel and $110 a barrel. “A new project must be able to break even at $70 oil” to win approval for investment, he said.

Before Friday’s decision, some smaller companies were considering giving up amid months of sagging prices. Often dependent on fickle capital markets to fund expensive exploration efforts, many have struggled to woo fresh investors amid today’s lower prices. At a recent board meeting, directors of U.K.-based  Fastnet Oil and Gas  PLC, an investor in an unsuccessful well in Morocco earlier this year, discussed whether to stay in the oil industry.

“We have $25 million, what should we be doing?” Fastnet Chairman Cathal Friel said. He said the board has considered returning the money to shareholders, or diversifying far from the oil patch, including a foray the “medical technology” business.

Other industries may get a boost from lower prices. Mining giant  Anglo American  PLC benefits from about $42 million in extra annual earnings for each $10 drop in the oil price over the course of a year, a spokesman said. And many airlines-if they haven’t locked in fixed prices for future fuel deliveries-could also come out ahead. Jet fuel typically accounts for 30% or more of a carrier’s costs.

The International Air Transport Association, which represents more than 200 carriers, estimates the airline industry will spend $7 billion less on fuel this year than in 2013 now that jet fuel prices are around 20% below the year-ago level.

Still, many carriers have tried to protect against volatility by locking in fuel prices early. That now leaves some paying more than market rates.  Ryanair Holdings  PLC, Europe’s largest discount airline, hedged about 90% of its anticipated full-year fuel consumption. The airline this month said it would take advantage of slump in oil to lock-in lower prices into 2017.

Henrik Meincke, chief economist at VCI, the association of Germany’s chemical industry, said lower prices, if they’re sustained, “will make raw materials less expensive for German chemicals companies.” The price of naphtha, a key raw material, is about 30% lower in November than in June, he said. Some of that gain, though, will vanish amid likely price competition, he said.

The cause of this turmoil was OPEC’s decision on Thursday not to cut output. Influential Saudi Arabian Oil Minister Ali al-Naimi argued against cutting production, a move some OPEC members had advocated to support prices, according to people briefed on his comments to fellow ministers at the oil cartel’s meeting. He conceded falling prices will be painful, according to these people, but losing long-term customers to U.S. shale producers would be worse.

Mr. Naimi wasn’t advocating forcing down prices to run U.S. shale producers out of business, these people said. Indeed, so-called break-even prices for shale production—the price at which wells remain economic—varies widely and can be relatively low. But Mr. Naimi warned that if OPEC cuts, non-OPEC crude likely will replace it. Attempts to reach the media office of the Saudi oil ministry weren’t successful.

“Saudi Arabia is trying out a new gambit,” wrote analysts at consultancy IHS Energy. “The Kingdom is testing the resilience of other producers to lower prices in trying to deal with rising North American oil production.”

The lower prices have sent fund managers scurrying to reallocate assets. Paris-based asset management firm Carmignac Gestion has pulled out of some investments in energy companies and started selling futures contracts linked to indexes of oil and gas producers to protect itself from price declines, said Sandra Crowl, a member of the firm’s investment committee.

Asset managers also were picking winners and losers among oil-producing governments.  Aberdeen Asset Management  has pulled investment out of oil-producing Nigeria and added to its positions in Turkey, a big oil importer, said portfolio manager Viktor Szabo.

“This is a massive positive for Turkey,” said Timothy Ash, a currency strategist at Standard Bank. He says each $10 drop in the price of a barrel of oil saves Turkey about $4 billion annually on energy imports.

—Benoît Faucon, Said Summer, Sarah Kent and Robert Wall contributed to this article.

online.wsj.com