When the price of oil rose above $50 a barrel in June, it looked like the worst was over for international oil companies. Few people expected a return to the industry’s $100 a barrel heyday, but steady recovery seemed under way.

Two months later, with prices back down to about $45 a barrel, that optimism has been extinguished.

The oil majors’ in recent weeks were mostly worse than expected, with sharp drops in profits, rising debts and gloomy outlooks.

As well as weak prices of crude oil and natural gas, margins for refined products are also being squeezed, as ripple down the supply chain. said its refining margins in the second quarter were the lowest since 2010.

“The glut of crude oil has translated into a glut of refined product,” says Michele Della Vigna, co-head of European equity research at Goldman Sachs. “So the integrated oil majors are getting hit at both ends.”

In response, companies are once again reducing spending. , fresh from its £35bn takeover of BG Group, said capital expenditure this year would be 38 per cent less than the pair jointly invested as standalone companies in 2014.

Yet, cost cuts alone are not enough to defend shareholder returns. With the exception of of Italy, all the oil majors have so far maintained their prized dividends — but they have had to increase borrowing to do so.

Shell’s net debt increased $5bn in the second quarter to a record $75bn. Simon Henry, chief financial officer, admitted the group’s debt to equity ratio was in danger of breaching its self-declared upper limit of 30 per cent.

“The fact that debts are creeping up shows that the majors are not able to fund their dividends organically at these prices,” says Tom Ellacott, head of corporate research at Wood Mackenzie, the energy consultancy.

A year ago, oil groups were talking about the need for a long-term break-even point of $60 a barrel. That was painful enough for an industry that had grown fat on prices twice that level. But companies are now acknowledging that even tougher action is required. BP, for example, is aiming to cover all its cash needs — including its dividend — at an oil price of $50-$55 a barrel by next year.

Analysts and industry executives say the squeeze is leading to a leaner, . Tens of thousands of jobs have been cut, contracts have been renegotiated with service providers and engineering processes simplified. “We’re starting to see the benefits of projects being reworked with much improved economics,” says Mr Ellacott.

These efficiency gains are lowering the potential cost of new oil and gasfields. Of the 13m barrels a day of proven but untapped resources available for development, the average break-even point has fallen $19 a barrel since the 2014 peak to $51, .

There have been tentative signs of lower costs giving companies confidence to resume the hunt for future growth.

“There’s a tricky balancing act between cutting costs to achieve cash flow neutrality while at the same time looking to the long term,” says Mr Ellacott. “We are seeing the majors trying to reposition their portfolios to the most attractive and lowest cost growth opportunities.”

In the past two months, BP has approved projects in Indonesia and Egypt, while gave the green light to a of the Tengiz oilfield in Kazakhstan.

There has also been a burst of acquisitions, with and each striking $2.5bn deals in recent weeks to , an exploration company focused on Papua New Guinea, and a controlling stake in a from , respectively.

However, these acquisitions are dwarfed by the under way to raise cash. Shell alone is looking to raise $30bn by 2018 from sales of non-core assets. Investment activity also remains . From 2007-2013, there were on average 40 large projects — defined as having reserves of 50m barrels of oil equivalent or more — approved each year. In 2015, there were just eight and so far this year there have been six.

Oil bulls believe these cuts will eventually lead to tighter supplies and drive recovery in prices and investment. Wood Mackenzie calculates that more than 20m barrels a day of new capacity needs to be developed by 2025 to offset production declines from existing fields and to meet future demand growth.

Some analysts doubt the arguments for cyclical recovery, pointing out that output from the Opec nations remains close to record highs while US shale production could be quickly intensified if the market tightens. Mr Della Vigna at Goldman Sachs believes oil is facing a “deflationary spiral” with plentiful supplies forcing the industry to become more efficient, which in turn leads to further increases in production at lower costs.

This analysis leads Mr Della Vigna to argue that the sacrifices being made by oil majors to defend dividends may be in vain. “They inflated their dividends in a high oil price environment and now cheap debt and disposals are propping them up. They’ve done enough to keep it going for a couple more years but, longer-term, they are going to have to review their payouts.”