Energy Business

What Oil Companies Should Have Learned From Mining Companies

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Since the beginning of 2011, some of the world’s largest mining companies have lost a third to nearly 90% of their market value as global demand for their products declined. In the same period, some of the world’s largest privately held oil companies have posted gains ranging from around 17% to about 26%.

If we had stopped the oil chart on July 24, oil company share price gains would have swelled to between 40% and nearly 66%. At no time since 2011 did the mining companies fall as far or as fast as oil companies have in the past four months.

Since early 2011, the price of iron ore pellets has dropped from nearly $220 per metric ton to less than $120, the same price that pellets sold for in 2009. That price swing has cost Vale S.A. (NYSE: VALE), BHP Billiton PLC (NYSE: BHP) and Rio Tinto PLC (NYSE: RIO) share price declines of 77%, 45% and 36%, respectively.

In a report titled “Mine 2011: The Game Has Changed,” consulting firm PricewaterhouseCoopers said:

To keep up with demand, the Top 40 [mining companies] have announced more than $300 billion of capital programs with over $120 billion planned for 2011, more than double the total 2010 spend. While not all will be completed, the sheer size and volume of the announced capital projects demonstrates an industry where fulfilling seemingly insatiable demand is the top priority.

Three firms — Vale, BHP and Rio — accounted for 50% of the total market cap of the top 40 mining firms, and total assets for the top 40 firms amounted to nearly $1 trillion. Mergers and acquisitions in the mining sector were just beginning to heat up, culminating in the February 2012 $41 billion acquisition of Xstrata by Glencore.

And then the music stopped.

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Growth in emerging markets slowed sharply and mining companies, as the industry had done in the past, had already committed to large projects that took billions to develop and years to bring to completion. By early 2013, mining company mergers and acquisitions over the past 10 years had totaled more than $1 trillion. Write-downs taken in 2012 had cost shareholders about $50 billion in value and they revolted.

Rio Tinto wrote down $14 billion assets in 2013 and the CEO was fired. Gold miner Anglo American wrote down $4 billion and fired its CEO. BHP Billiton wrote down $3.3 billion in August 2012 on natural gas and aluminum projects, and Vale took a $4.2 billion charge in 2012.

The oil and gas business is doing all it can to avoid overstretching. Since late July, the share price for Exxon Mobil Corp. (NYSE: XOM) has dropped about 11%, while Chevron Corp. (NYSE: CVX) and Royal Dutch Shell PLC (NYSE: RDS-A) have both lost nearly 20%. BP PLC (NYSE: BP) is down 23%. The suddenness and degree of the crude price decline and the collapse of stock prices happened far more quickly than the decline in mining, but the oil companies appear to have learned some things from the mining company disasters:

  • Don’t wait too long to cut costs
  • Don’t wait too long to shed assets
  • Don’t make shareholders (and boards of directors) mad
  • Don’t expect miracles

ConocoPhillips (NYSE: COP) earlier Monday morning announced a 20% year-over-year cut to its capex budget for 2015. We will be hearing from the major integrated companies early next year about their plans for capex budgets. And we should expect to hear variations on the four “learnings” listed above from every company.

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