Oil and gas companies slashed capital spending by 24% last year, with more cuts expected: S&P

Oil refineries and other heavy industrial plants on Jurong Island.
Oil refineries and other heavy industrial plants on Jurong Island. PHOTO: ST FILE

SINGAPORE - Oil and gas companies cut their spending on physical assets such as plant and equipment by nearly a quarter (24 per cent) in 2015, with a further 15 per cent reduction slated for 2016, according to the latest analysis by Standard & Poor's Ratings Services.

The magnitudes in metals and mining are similar, with a 22 per cent reduction capex decline in 2015 and a further 20 per cent cut expected this year, said the credit rating agency.

S&P said the cuts are far more severe than its previous August 2015 survey suggested, and point to the extreme urgency with which commodity-related companies are addressing the pressures on cash flow created by slumping prices and global overcapacity.

Oil and and mining companies were the worst hit in the study by S&P, which also highlighted that glocal capital expenditure, or capex for short, suffered a severe retrenchment in the past six months.

Driven by plunging commodity prices, global capex fell 10 per cent in 2015, and is likely to shrink further - albeit it at a slower pace of 4 per cent this and next 2 per cent in 2017.

The other piece of good news is that excluding energy and materials, capex is forecast to grow 2 per cent this year - with more spending coming from companies in the IT, consumer discretionary (autos and media), and health care sectors.

"But taken as a whole, this provides little consolation given renewed concerns about the fragility of the global economy and questions about the efficacy of central bank efforts to trigger investment," said S&P in its report on Friday (March 18).

If its projections are realized, the real-term value of global corporate capex in 2017 will have slipped back to where it was in 2006, said S&P.

The cuts are far more severe than its previous August 2015 survey suggested, and point to the extreme urgency with which commodity-related companies are addressing the pressures on cash flow created by slumping prices and global overcapacity.

Of the 32 companies in its survey that were expected to invest more than US$10 billion in 2016, 25 have seen estimated spending fall in the past six months. Their total expected capex outlay has fallen by US$58 billion from US$549 billion to US$491 billion.

Said Gareth Williams, S&P's senior director for corporate research: "Our pessimism regarding the corporate capex outlook is founded on the weak prospects for commodity-related capital investment but, even so, the scale of recent cutbacks has been remarkable.

"In addition to the slump in commodity capex, global overcapacity remains a problem for industries such as steel and shipping. More broadly, poor revenue and EBITDA trends explain much of the paucity of capex growth."

S&P also noted that the continuing weakness in capex is a global phenomenon. All regions saw corporate capex contract in 2015, and only Japan - a country with less commodity exposure - is expected to see growth in 2016.