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.
Read also: SA's hopes high as majors search for oil and gas
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.”
BLOOMBERG