Big Oil needs new model to endure $60 crude, Morgan Stanley says

JAVIER BLAS

NEW YORK (Bloomberg) -- The world’s largest oil companies need to change their business model to increase shareholder returns during a period of depressed crude prices, a report published by Morgan Stanley and The Boston Consulting Group said.

“The days of Big Oil are by no means over, but today’s environment requires a change to the model,” according to the report published on Monday.

The prize on offer is a 50% gain for their share prices, the authors at the investment bank and management consultant said.

The report comes as investors question how companies including Exxon Mobil Corp., Royal Dutch Shell Plc, Chevron Plc, BP Plc and Total SA will weather the drop in oil prices to about $60/bbl from $100 a year ago. Even before the collapse in prices, the largest oil producers saw lower returns on capital and some companies were struggling to generate enough cash to cover their investments and dividends.

The new period of cheap oil and ample supplies brought about by the boom in U.S. shale production has raised a prospect unthinkable as recently as a few months ago—that the world no longer needs all the big, expensive projects planned by companies including Shell, Total and Exxon.

Morgan Stanley and Boston Consulting said companies needed to “undergo a dramatic” drop in costs and, even more importantly, change the culture to sustain savings.

“Big Oil still lacks a truly cost-conscious culture,” the report said. At the same time, the authors recommended that major oil companies change their mentality from broad generalists to becoming niche specialists.

Morgan Stanley and Boston Consulting said there’s historical precedent for their prescription. In 1986, after a similar price collapse, major oil companies cut costs and improved efficiency.

That “allowed strong earnings and share performance in subsequent years, despite an extended period of oil price weakness,” according to the report.