Oil Majors Making More Money at $50 Oil Than $100, and Deep-Sea Drillers Aiming to Get in on the Action

BP, Royal Dutch Shell, and Transocean are among many companies that view $50 oil as the "magic" number.

Oil at $50, once thought of as a disappointing market price and more recently a benchmark of acceptability, is now regarded as a figure that is enabling European oil majors to make a tidy profit - as well as something in the sights of deep-sea drillers as they try to lure customer spending from on-land shale wells.

According to data from Goldman Sachs Group Inc., the overseas majors made more money in the first half of this year when Brent averaged $52 per barrel than they did in the same period of 2014 when prices were $109.

These companies have become so efficient that they generated enough cash from operations to cover 91 percent of their capital expenses and dividends in the second quarter.

Goldman Sachs also reveals that integrated firms such as BP Plc and Royal Dutch Shell Plc have achieved these gains by adapting to lower prices via cost cutting and operational improvement - as well as divested some assets to reduce debt burdens.

The bank stated, "Simplification, standardization and deflation are repositioning the oil industry for better profitability and cash generation in the current environment than in 2013-14 when the oil price was above $100 a barrel."

According to the Goldman Sachs report, dividends from the big European firms are expected yield 6 percent backed by an estimated 6 percent free cash flow yield next year, compared to a projected   3.6 percent dividend yield in total for the STOXX Europe 600 Index.

The concept of $50 as a "magic" number was given further credence on Thursday when Jeremy Thigpen, chief executive officer of Transocean Ltd., told analysts and investors, "Break-even costs in multiple deep-water basins around the world are consistently coming in below $50 and are now often around, if not below, $40.

"Deep-water break-evens are starting to compare favorably with onshore, which by the way is now experiencing some fairly significant price inflation across most products and services."

It is expected that Transocean, which is the world's biggest provider of offshore rigs, could soon shift spending from land to sea as crude futures hover around the $50 mark.

The potential for growth is substantial:only half of the oil industry's 817 offshore rigs are currently working, down from 92 percent in 2008, according to Wells Fargo; Transocean has signed a dozen new drilling contracts or extensions  so far this year, worth $221 million, and this prompted Terry Bonno, the company's senior vice president of industry and community relations, to remark, "It is beginning to feel a lot like we are moving off bottom."

It's unclear what impact the shift from land to sea will have on the global market in total, especially when factoring in the predictions from many analysts of an impending peak in crude demand, case in point: in May, Tony Seba, co-founder of RethinkX, said, "oil demand will peak in 2020/21 and go down to about 100 million barrels and go down to 70 million barrels within 10 years; essentially what that means is that the new equilibrium price is going to be $25."