Chevron (CVX) is scheduled to release its fourth quarter and full year earnings results this Friday. Investors will not only be looking at how the company performed in 2016, but will also be eager to get a sense of the company’s investment plans for 2017. Oil companies have aggressively scaled back capital expenditures since the oil price downturn in 2014. The chart below shows capital expenditure for ExxonMobil (XOM), Chevron and ConocoPhillips (COP), which collectively fell by 47.3% from 2013 to 3Q-2016.

This has left some industry experts wondering if spending reductions have gone too far. For example, Saudi Arabia's energy minister Khalid A. Al-Falih has warned that there could by a global oil shortage as soon as 2020 if investment flows continue to be scaled back. In an investor presentation in November 2016 posted on Chevron’s website, the company says it plans to reduce capital and exploratory spending again in 2017 by about 25% from planned 2016 spending. Friday’s results should provide an update into whether these spending cuts are being accelerated or scaled back in a rising oil price environment.

China Boosts Investment Spending

Some companies are already boosting investment spending. Bloomberg reported on Friday that China's largest offshore oil explorer, CNOOC (CEO), is planning to increase investment spending in 2017 between 19% and 39% for the first time since 2014. The marginal spending increase is equivalent to approximately $8.7 to $10.2 billion, or equal to roughly half of Chevron’s entire 2017 budgeted capital spending.

The Bottom Line

2017 will likely be a pivotal year for the oil industry. Those companies increasing investment spending could benefit if oil prices continue their upward path. A renewed downturn in prices, however, could see those who increased spending nursing large losses. On the other hand, companies that are scaling back investments could see their long term competitiveness eroded, especially if the oil shortage predicted by Saudi energy minister comes to pass.

Chevron reports financial results on Friday January 27th, followed by Exxon on January 31st and Conoco on February 2nd.

 

Disclaimer: Gary Ashton is an oil and gas financial consultant who writes for Investopedia. The observations he makes are his own and are not intended as investment advice. Gary does not own any stocks mentioned in this article.

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