In recent weeks, the big US oil companies announced their Q4 financial results and offered guidance into what 2015 will look like.
One theme has been consistent across the board: less capital spending.
With oil prices crashing and demand not as robust as it used to be, there’s been little financial incentive for energy companies to drill as aggressively as they have been doing during much of the economic recovery.
Energy is a small, but not insignificant component of the economy. It’s the largest component of capital expenditures in the S&P 500. From Goldman Sachs’ David Kostin:
We reduce our forecast S&P 500 capex growth in 2015 to -3% from +6%.
Since we published our forecasts in November, the price of Brent crude has dropped by 40%. Accordingly, while only 14 of 43 S&P 500 Energy firms have reported 4Q EPS, companies have already slashed capex budgets. SLB will cut 2015 capex by 25% ($US1 bn), HAL cited customer budgets down 25%- 30% on average, COP plans to drop spending by 33% ($US6 bn), OXY slashed plans by 33% ($US3 bn), and [Friday] morning CVX announced a budget 13% ($US5 bn) below 2014 spending. We expect total Energy capex will collapse by 25% in 2015 (Exhibit 1). The sector accounts for 33% of S&P 500 capex and should drag total S&P 500 capital expenditure growth into negative territory.
Overall for S&P 500 companies, Kostin estimates capital expenditures will decline 3% year-over-year to $US676 billion.
None of this is to suggest the economy or stock market as a whole is doomed to collapse. Indeed, with capacity utilization near 80%, the outlook for capex in most other industries remains promising.
Furthermore, Kostin sees continued growth in other forms of corporate spending. R&D spending is estimated to climb 3% to $US246 billion, cash acquisitions are expected to jump 37% to $US195 billion, share buybacks are expected to rise 12% to $US604 billion, and dividends are expected to grow 7% to $US404 billion.
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