London - Big Oil’s struggle against crude’s collapse is starting to ease, giving some companies enough cash to pay shareholders without piling on more debt.
The world’s five biggest non-state oil producers, known as the super majors, probably increased cash from operations by a combined 67 percent last quarter from a year earlier, according to HSBC Bank Plc analysts Gordon Gray and Kim Fustier. That may allow some to cover dividends and capital spending without borrowing for the first time since 2012, they said.
In the past three years, Exxon Mobil Corp., Royal Dutch Shell Plc, Chevron Corp., Total SA and BP Plc have cancelled billions of dollars of projects, dumped thousands of jobs and amassed towering debts to weather crude’s decline. While prices are still half their 2014 level, a partial recovery, coupled with spending cuts, contributed to “sweet-spot” conditions in the first quarter that probably drove up earnings, according to Morgan Stanley.
The “macro environment was favourable for the majors during the first quarter,” said Martijn Rats, an analyst at Morgan Stanley in London, citing higher prices and resilient refining margins. “In addition, cost reductions are still coming through,” helping bring a “significant improvement in net income,” he said.
The five companies combined are expected to more than double first-quarter net income, according to analyst estimates compiled by Bloomberg. Chevron will return to profit while Shell’s earnings will rise to a seven-quarter high, the estimates show. Exxon, Total and BP may post their biggest profits since September 2015.
“The oil price is a big thing, but the other thing is they’ve also been helping themselves by taking operating costs out of the business,” said Jason Gammel, a London-based analyst at Jefferies International Ltd. “We are at oil-price levels where most of these companies are pretty close to covering their dividend.”
The big five oil producers also operate refineries and petrochemical plants, giving them a safety net during crude’s downturn when earnings from oil and gas production sank. Refining margins rose during the worst of the slump as the cost of the raw material, crude oil fell while demand for fuels stayed strong. Margins have since narrowed but remain buoyant.
Yet doubts remain. Oil’s recovery has stalled this year as a revival in US shale production threatens an attempt by the Organisation of Petroleum Exporting Countries and its allies to eliminate a global oversupply. Although benchmark Brent crude rose more than 50 percent last year, prices are down about 9 percent in 2017.
Amid concern that OPEC and its partners will fail to reduce stockpiles significantly, energy companies have performed worst in the MSCI World Index this year, tumbling from pole position in 2016. After rising 44 percent last year, BP’s shares are down 12 percent in 2017 while Shell’s B shares are about 11 percent lower in London. Exxon has dropped 9.5 percent, Chevron 9.3 percent and Total 2.2 percent.
The majors won’t come roaring back until oil prices rally further, according to Alastair Syme, an analyst at Citigroup Inc.
“The sweet-spot of financial firepower and therefore higher returns to shareholders still requires significant price recovery,” Syme said in an April 19 note, downgrading both Shell and BP. While the companies have offered shareholders stock in place of cash, and implemented hefty cost cuts, they still haven’t adequately tackled the high cost of dividends, he said.
Dividend yields at Shell and BP, which fell through 2016 as crude started to recover, have risen this year, typically a signal that investors fear a cut in payouts.
BP declined to comment when contacted by email. Shell referred Bloomberg to Chief Executive Officer Ben van Beurden’s comments earlier this year, when he said free cash flow “more than covered our cash dividend” in the fourth quarter.
France’s Total will kick off the super majors’ first-quarter earnings season on April 27, with Exxon and Chevron following the next day. BP will report on May 2 and Shell on May 4.
“You’d hope by now the cost and spending cuts start showing up in the accounts,” said Iain Armstrong, an analyst at Brewin Dolphin Ltd., which owns BP and Shell shares. “Benefits of oil prices will be a major factor and how much of that the companies have been able to capture with lower costs.”