When the going gets tough, the tough want cash flow. In the resources sector, investors are more likely to find that in mining than in oil and gas.
Both industries have struggled as prices of commodities have tumbled. Oil’s recent comeback appears to have run its course. Weak economic signals from China will weigh on commodities from metals to iron ore. And miners and drillers now sing the same tune: Spending restraint, cost-cutting and preservation of cash flows are the order of the day.
But the miners got there first, and it shows.
Miners started cutting capital expenditures and shelving ambitious projects back in 2012, a shift that was followed by a change of management at big companies including BHP Billiton, Rio Tinto and Anglo American. Even before the price of iron ore collapsed, investors objected that the fruits of China’s rapacious demand for commodities had been squandered on multibillion-dollar growth plans and ill-conceived deals.
At oil-and-gas companies, helped by a crude price that stayed stable at about $110 a barrel until last June, the same message took longer to get through. BP shed assets and put the brakes on spending, but only after the 2010 Macondo disaster. France’s Total in mid-2013 pledged greater spending discipline to investors who, again, felt the rewards of high oil prices had been wasted. Exxon Mobil and Chevron, while they have cut budgets, are still investing north of $30 billion a year each.
While Rio Tinto’s capital expenditure has more than halved since 2012, Royal Dutch Shell’s investment, including acquisitions, has barely budged. Forecast capital expenditures by the four biggest global miners this year, according to FactSet, is about two-thirds of expected aggregate operating cash flow. For Europe’s biggest oil companies—BP, Shell, Total and Eni—that figure is close to 95%.
Most miners, on current forecasts, can cover their dividends from cash flow this year, with Anglo as the notable laggard. But the oil companies are billions short of balancing the books. Hence, Shell and Total have reintroduced payment of some dividends in shares, while Eni already has announced a dividend cut.
Cutting spending is harder in oil and gas: Up to 90% of near-term expenditures already are under contract, and many fields require constant spending to offset natural decline rates.
But stocks in both miners and oil companies have markedly lagged behind the market this year, and companies that have cut harder have been rewarded. Faith in commodities forecasts is low and some sense of stability is needed for that to change. But it is Big Mining, overall, that looks better placed to hunker down in the meantime.
Source: Wall Street Journal
