The integrated majors' strong cash flows appear unstoppable for now, but their prosperity belies formidable challenges to replace their reserves, grow their production and control costs, Moody's Investors Service reported last week.

In a special commentary, "The Integrated Majors: Abundant Cash Flows but Limited Capital Opportunities," Moody's analysts reviewed the seven major public oil companies controlling the largest concentration of reserves and production besides the national oil companies (NOC) and a few quasi-private companies: ExxonMobil Corp., BP plc, Royal Dutch Shell, Total SA, Chevron Corp., Eni SpA and ConocoPhillips.

Moody's financial ratings for this group of majors are at the top of the heap, but the real issue in the longer term is whether they will be able to retain a differential advantage based on capital resources and technology, and the extent to which their competitive ranking within the oil and natural gas industry gradually will be eroded by NOCs, said Moody's Senior Vice President Thomas Coleman.

"Unlike the NOCs, with whom they are increasingly in competition with for global resources, the majors must stay focused on the demands of their private shareholders, only secondarily considering national security or political issues in making investment decisions," said Coleman.

Higher oil and gas prices have allowed capital spending to increase across the industry, but the majors' spending has not kept pace with rising energy prices and the higher internal cash flows generated by the companies, Moody's found. None is "pursuing growth for the sake of growth, and shareholder returns have become more important. The primacy of shareholder returns, combined with increasingly restricted access to the most prolific new resources, has led to rising shareholder payouts, with these companies investing only about 50% of their cash flow back in the business."

Given the sheer scale of their output, which ranges from 2.3 MMboe/d to up to 4.3 MMboe/d for ExxonMobil, the producers all face a "trend of declining organic reserve replacement, and production growth is flat-to-down. Most face embedded decline rates of 5-6% a year from their mature basins in North America, the North Sea and other areas such as West Africa, and the challenge is compounded by the resource access issues..."

According to Moody's, average production growth for the majors is projected to be in the area of 1% over the next three years, "with natural gas a greater source of growth than oil."

Most of the majors stopped forecasting annual production growth rates because of "numerous recent disappointments," and they instead provide multi-year target production ranges as market guidance, Moody's noted. "The difficulty stems not just from high embedded decline rates on mature assets, but from major project delays, cost run-ups and disruptions due to weather and political events."

The analysis found that between 2002 and 2007 the production curves for ExxonMobil, Chevron and Total were more or less flat and Shell's has declined. BP, ENI and ConocoPhillips showed production growth -- but organic production, excluding acquisitions, would have been down for virtually all the companies except ExxonMobil. Chevron's flattish curve included incremental production from its Unocal Corp. acquisition, and ConocoPhillips' large production increase followed its acquisition of Burlington Resources in 2006 and rising equity barrels from LUKOIL (see related story).

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