Rising oil prices have not caused national oil companies (NOC) to lose sight of the cost-efficient strategies that kept them afloat during the downturn like their non-state-owned counterparts.

Many NOCs will continue to spend cautiously as improving oil prices free up cash for more investment, higher production and growing operations outside their borders, according to a report released recently by Moody’s Investors Service.

“Even though strategies for each NOC depend on a number of factors such as the relationship with their national governments and prices in local markets, national oil companies overall have strived to cut costs, adjust growth strategies or sell assets as much as non-sponsored private oil companies have done,” Steve Wood, managing director for Moody’s oil and gas team, said in the report.

Moody’s took a look at how NOCs responded to falling oil prices and gave thoughts on how their actions—including altered policies and structures—could impact their future moves.

While NOCs coped with the downturn by cutting costs and spending in line with others, diverse operations that include downstream refining and petrochemical operations softened the blow of upstream losses. Some companies shed assets to bring in cash, while others halted plans to add assets in other parts of the world. Many drastically cut exploration spending.

“But unlike most other integrated oil companies, Italy’s de facto NOC [Eni, a public company in which the Italian government has a 30.1% ownership interest] successfully pursued its dual exploration model strategy during the downturn, generating cash from asset sales even before production had begun,” Moody’s said in the report. “Dual exploration allows the seller to retain a major portion of its newly discovered resources to ensure organic production growth while also ensuring their early monetization.”

Eni’s asset sales raked in about $10.3 billion during 2015-2017, mainly from selling stakes in its new oil and gas discovery assets, according to Moody’s. These include selling 50% interest in the Zohr gas field offshore Egypt to Rosneft (30%), BP (10%) and Mubadala Petroleum (10%) to generate more than $2.5 billion. Eni also sold 25% interest in Area 4 offshore Mozambique to Exxon Mobil Corp.

Sven Reinke, senior vice president of oil and gas for Moody’s, told Hart Energy that the dual exploration model is not unique to Eni but it is not common among larger integrated oil and gas companies. Superior exploration success is required of successful dual exploration models, Reinke said, adding not everyone can achieve this.

“The dual exploration model is more common amongst E&P companies as they are usually smaller than integrated oil and gas majors and are therefore more in need of sharing capital investment requirements in order to start production at newly discovered assets,” Reinke said.

“It is reasonable to assume that higher oil prices and the recovery of cash flow generation and financial profiles of many integrated oil and gas majors as well as E&P companies will lead to gradually higher exploration activities over the next 12-18 months, which in turn could also increase the number of transactions whereby stakes in new projects are being traded.”

Moody’s pointed out that Eni, like its integrated peers, plans to spend less this year. Spending is expected to fall to about $10.5 billion, down from $11.3 billion in 2017 and $16.3 billion in 2014.

Yet, other NOCs—such as China’s CNPC, CNOOC and Sinopec Group—plan to spend more in 2018 than they did in 2017: CNPC, about $40.1 billion estimated for 2018, up from $38.4 billion in 2017; CNOOC, $21 billion, up from $15.8 billion; and Sinopec Group, $23.1 billion in 2018, up from $22 billion. The Chinese NOCs were among those that benefited from having diverse operations during the downturn.

“CNPC will likely expand more cautiously following cost-cutting efforts and reforms that allow private investment in state-owned enterprises, increasing capital spending to support its long-term growth while following Chinese government policy for deleveraging,” Moody’s said. “CNOOC has expanded capital spending plans with more favorable oil prices but will very likely be prudent with overseas ambitions to comply with government guidance on deleveraging. Sinopec is also set to increase capital spending again after its defensive efforts when oil prices fell.”

Norway’s Equinor, formerly Statoil, plans to spend slightly more—$12.6 billion in 2018, compared to $12.4 billion, according to Moody’s. “Statoil did not change its strategy or business profile substantially in response to low oil prices,” Moody’s said. The company, however, did change its name in May to reflect its transition to a broad energy company. Its assets include fossil fuels and renewables such as offshore wind.

“The company has acquired some international assets, paying Brazil’s Petrobras $2.5 billion for a 66% operating interest in offshore license to work in Brazil’s prolific Santos basin,” Moody’s said. “But in general Statoil’s concentration on production and proved reserves in the NCS [Norwegian Continental Shelf] has actually increased with the company’s successful production growth and cost-cutting.”

The report also noted how energy reform impacted Mexico’s Pemex while a corruption scandal rocked Brazil and state-owned Petrobras, adding to low oil price woes. But Petrobras is working to sell some of its upstream assets and is considering selling some of its downstream business to bring in more money to fund E&P projects, including presalt, as Pemex teams up with foreign oil companies in pursuit of oil and gas in hopes of boosting Mexico’s production.

“In Russia, both Rosneft and Gazprom, whose revenues rely heavily on domestic production for exports, count on very strong support from the national government,” according to Moody’s. “This support was key for Russia’s NOCs during the 2014-16 price slump, either in the form of tax reductions or tolerance regards lower dividend payments. Now, with better international prices, both companies are set to benefit from higher export revenues, while maintaining their focus on domestic development projects.”

If NOCs are able to increase free cash flow through asset sales, higher export revenue or by other means, what they do with it depends on the company and the country’s needs.

“In the case of NOCs in Latin America, the emphasis usually is on the company’s capacity to pay taxes and dividends to their controlling entities, the governments; this is the case of PEMEX (A3 stable) and PDVSA (C stable), where capital investment needs come in second place given government’s large cash needs to cover fiscal deficits,” Moody’s Senior Vice President Nymia Almeida told Hart Energy. “In the case of Ecopetrol (Baa3 stable), Petrobras (Ba2 stable), and YPF (B2 stable), they have shown flexibility to reduce dividend payouts in order to assure a minimum level of capex that sustains reserve replacement, production growth and debt repayment.”

Velda Addison can be reached at vaddison@hartenergy.com.