Big Oil to confront tough choices as mega profits fade into memory
Oil pumps operate at sunset at the Daqing Oil Field in Daqing, Heilongjiang Province, China, on November 18, 2024.
VCG | Visual China Group | Getty Images
Energy giants are being forced to face some tough choices in a weaker crude oil price environment, with generous shareholder payouts expected to come under serious pressure in the coming months.
Including US and European oil giants ExxonMobil, Strip, Shell And blood pressureThey have recently moved to cut jobs and cut costs as they try to tighten their belts amid the industry downturn.
It reflects the stark change in mood from just a few years ago.
In 2022, the West’s five largest oil companies made a combined profit of nearly $200 billion as fossil fuel prices soared following Russia’s full-scale invasion of Ukraine.
Cash flow from Exxon Mobil, Chevron, Shell, BP and similar companies Total Energies UN Secretary-General António Guterres said:monster profit“ Rewarding shareholders with higher dividends and share buybacks.
The amount of cash yield as a percentage of cash flow from operations (CFFO) has been as high as 50% for many energy companies in recent quarters, according to Maurizio Carulli, global energy analyst at Quilter Cheviot.
It is better to reduce buybacks rather than dividends: Buybacks are important for investors, but dividends are not.
Clark Williams-Derry
Energy finance analyst at IEEFA
But in today’s environment of weak crude oil prices, Carulli said this policy risks leading to new levels of debt beyond what would be considered a “healthy” balance sheet.
BP and more recently TotalEnergies have announced plans to take steps to reduce shareholder returns.
Quilter Cheviot’s Carulli called it a “logical change of direction” and noted that other oil majors would likely follow suit.
Thomas Watters, managing director and industry leader for oil and gas at S&P Global Ratings, echoed that sentiment.
Oil refinery at sunrise: Aerial view of industrial power and energy production.
Chunyip Wong | E+ | Getty Images
“Oil companies are under pressure as crude oil prices soften and the potential for prices to fall to the $50 range next year as OPEC continues to release excess capacity and global inventories rise,” Watters told CNBC via email.
“Faced with the challenge of sustaining those returns in a lower-priced environment, many will seek to reduce costs and capital expenditures wherever they can,” he added.
Dividend cuts ‘would cause shivers on Wall Street’
Clark Williams-Derry, an energy finance analyst at the Institute for Energy Economics and Financial Analysis (IEEFA), a nonprofit organization, said scaling back share buybacks is probably Big Oil’s easiest option.
“Over the past few years, oil companies have used buybacks to return cash to investors and support share prices. And reducing buybacks is better than dividends: For investors, buybacks are the gravy, but dividends are the meat,” Williams-Derry told CNBC via email.
“A dividend cut would send shivers down Wall Street,” Williams-Derry said.
Saudi Arabia’s state oil producer Saudi Aramco did just that earlier in the year, The world’s largest cut its dividend amid an uncertain outlook for oil prices.
Brent crude futures year-to-date.
IEEFA’s Williams-Derry attributed the move to the steady weakening of Saudi Aramco’s share price for much of this year, and said other private oil giants would want to avoid the same fate.
Finally, Williams-Derry said there are three questions oil majors will likely need to consider as the rise in oil prices in Ukraine comes to an end.
“Are they continuing to take on new debt to finance shareholder payouts? Are they reducing buybacks, eliminating one of the most important factors supporting share prices? Or are they signaling weaker production in the future by reducing drilling?” Williams-Derry said.
“Every choice has risks, and no matter what they choose, they will make some investors unhappy,” he added.
Big Oil outlook
For some, Big Oil’s current situation is not as bad as it seems.
“Perhaps it wasn’t as bleak as people expected at the beginning of the year because you had the narrative since Trump announced his tariffs in April that the oil market was going to be in a glut and oversupply period later in the year,” Peter Low, co-head of energy research at Rothschild & Co Redburn, told CNBC via video call.
“What really surprised people was how resilient oil prices were, staying roughly in the $65 to $70 per barrel range,” he added.
Oil prices have since fallen below this range.
International comparison Brent crude futures for delivery at the end of December were traded at $64.97 per barrel, down 0.4% on Friday, while US West Texas Intermediate futures at the end of November were traded at $61.24, down 0.3%.
“The question, probably less for Q3 and perhaps more for Q4, is the extent to which distributions and buybacks in particular may need to be cut to reflect a weaker commodity price environment,” Low said.
“I think given that Q3 was smooth, they’ll probably wait to see what happens in the coming weeks and months, and Q4 would be a more natural point for them to reconsider shareholder allocations,” he added.
TotalEnergies and British Shell are scheduled to report third-quarter earnings on October 30; Exxon Mobil and Chevron will follow suit on October 31. BP is set to announce its quarterly results on November 4.
