Oil having lost almost a quarter of its value since September means that Exxon Mobil Corporation (NYSE:XOM), Total SA (ADR) (NYSE:TOT) and BP plc (ADR) (NYSE:BP) are trending on one of the most precarious positions in terms of earnings. Energy companies have already lost 15% of their book value over the past three months as the sickening decline in oil prices continues to rumble. The ongoing drop in oil prices calls for a change in the way these companies have been doing business over the past 40 years, According to an article published by Barron. If shareholder value has to be guaranteed going forward.
BP plc (ADR) (NYSE:BP) and Exxon Mobil Corporation (NYSE:XOM) have over the years perfected the art of spending billions of dollars on generating lower returns all while remaining stable in generating impressive dividends to the excitement of their shareholders. The wave of spending needs to be curtailed if these companies are to be successful in sustaining their operations amidst a further slump in oil prices.
It is high time that Total SA (ADR) (NYSE:TOT), BP plc (ADR) (NYSE:BP) and Exxon Mobil perfected the art of being leaner and more efficient in the wake I of oil prices threatening to sink even further. The giant oil companies also need to take advantage of the ongoing turmoil and carry out acquisitions especially of smaller players in the energy sector that have been hard hit.
Estimates are poised to continue dropping as analysts maintain that lower oil prices may be in for a long stay. Citigroup analyst expects ROE’s to drop to lows of 7% in 2015 down from high of 20% as of last year. This essentially calls for cutback measures if Exxon Mobil Corporation (NYSE:XOM) and Total SA are to stay afloat in terms of impressive earnings.
Cost Control Measures
Cost control measures are some of the measures that BP plc (ADR) (NYSE:BP) and Exxon Mobil have shunned over the years, but essential going forward. Cost savings through better spending are a must going forward, as well as cutbacks on the supply chain. Should oil companies be successful in cutting costs by 15% then they would be in line to accrue a 2% point increase in ROE even if oil prices are to stagnate at the $70.
The slump in oil prices has also made the likes of BP look fairly attractive currently trading below fair value. BP plc (ADR) (NYSE:BP) is trading at 10.4 times its 2015 earnings meaning an entry at the current levels followed by a spike in oil prices is sure to guarantee some of the best gains.