By Bradley Olson and Sarah McFarlane
Investors want just one thing from the world's biggest oil
companies: cold, hard cash. But it is becoming harder for the oil
giants to deliver.
Companies such as Exxon Mobil Corp., Royal Dutch Shell PLC and
BP PLC have long used hefty and reliable dividends to keep
investors on board in a sector that has volatile profits tied to
commodity prices. The importance of the payments has only grown
recently, as investors have become wary of the companies due to
short-term concerns about oil overabundance, and long-term fears
that climate change and electric vehicles cloud the future of
fossil fuels.
But as the companies throw money at investors through dividends
and share buybacks to keep them from fleeing, the payouts have
begun to strain their balance sheets.
Exxon and France's Total SA haven't generated enough cash this
year to cover new expenses and dividends, according to FactSet data
and company disclosures. BP was able to cover its dividend, but the
company's debt levels rose relative to its market capitalization.
Shell needed asset sales to help cover dividends and buybacks.
Energy has been the worst performing sector of the S&P 500
for more than a decade, and the third-quarter earnings have
continued a lackluster streak that has lasted throughout the year.
Exxon, which remains under pressure to return to its practice of
buying back billions of dollars in shares annually, reported net
income of $3.17 billion, down about 50% from the same period a year
ago, but slightly better than what analysts had expected. Exxon
increased its annual dividend in the first quarter, a step the
company has taken for 37 years in a row.
Chevron Corp. reported net income of $2.6 billion from July to
September, down from $4 billion in the same period in 2018. The
company increased share buybacks to $1.25 billion in the
quarter.
Shell's U.S. shares fell 3.5% Thursday after shell warned that
it might not finish buying back $25 billion in shares by 2020 as
originally expected. BP's U.S. shares fell by more than 3.3%
Tuesday after BP reported a loss and failed to increase its
dividend.
Oil and gas companies now make up about 5% of the S&P 500
index, down from 14% a decade ago, according to Evercore ISI. Their
middling recent returns limit their ability to step up shareholder
payments that investors increasingly demand as a key step that
would bring them back into the sector.
"Eventually, oil demand is going to go down," said Kevin Holt, a
senior portfolio manager for Invesco Ltd., which has more than $1
trillion in assets under management. "With that question of
terminal value, it's even more important that companies ramp up the
cash return. Why grow the business if we won't need as much oil in
20 years?"
While Mr. Holt says oil demand may not decline for two decades,
investors now want more cash returns because companies spent too
much when prices were high, setting the stage for poor performance
when prices fell.
Investors have long gotten generous dividends from big oil. In
the U.K., Shell and BP combined pay one in every seven pounds of
the FTSE 100 dividend, said Jason Kenney, an analyst at Spanish
bank Santander. Shell hasn't cut its dividend since 1945.
Giant oil companies have found this harder to sustain since
2016, when oil prices plummeted to below $30 a barrel, from above
$100. For at least two years, many big oil companies were
generating a free cash flow that was either negative or below the
combination of their capital-expenditure commitments and their
dividends, said Mr. Kenney.
Chevron, the second-largest U.S. oil company, has been an
exception to this trend. For years, Chevron spent far more on new
oil projects than it generated from operations, but the company has
entered a harvest mode in recent years as those developments began
production. In the first half of this year, Chevron generated $7.3
billion in excess cash, more than enough to pay for about $4.5
billion in dividends and almost $1 billion in buybacks.
Many big oil companies have relied heavily on asset sales to
help pay for buybacks, dividends and in some cases even fund new
investments, as the amount of cash they generated wasn't nearly
enough to cover those costs. Since 2014, Exxon, Shell, BP, Total
and Chevron have sold off more than $110 billion in assets,
according to FactSet data.
That strategy worked as long as assets sold for a high enough
price. But the lack of investor interest in fossil fuel companies
has brought new challenges in this arena as well. BP sold off some
U.S. assets at lower prices than expected in the quarter and was
forced to book a $2.6 billion write-down.
Exxon has so far fared better as it launched a plan to sell $15
billion of assets by 2021. In September, the company announced a
$4.5 billion sale of properties in Norway. Analysts at Mizuho
Securities had pegged the value at about $3.3 billion. Exxon Chief
Executive Darren Woods said the company reached about a third of
its target, and the company continues to weigh potential asset
sales in Australia.
Exxon's oil and gas production rose by about 3% to 3.9 million
barrels a day in the third quarter, driven primarily by its massive
ramp-up in the Permian Basin in Texas and New Mexico.
It reported a third-quarter profit of $3.17 billion, or 75 cents
a share, compared with $6.24 billion, or $1.46 a share, a year ago.
Analysts polled by FactSet were expecting earnings of 69 cents a
share. Revenue fell to $65.05 billion from $76.61 billion a year
earlier. Analysts had expected $60.90 billion of revenue in the
quarter, according to FactSet.
Write to Bradley Olson at Bradley.Olson@wsj.com and Sarah
McFarlane at sarah.mcfarlane@wsj.com
(END) Dow Jones Newswires
November 01, 2019 08:59 ET (12:59 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
Bp (LSE:BP.)
Historical Stock Chart
From Mar 2024 to Apr 2024
Bp (LSE:BP.)
Historical Stock Chart
From Apr 2023 to Apr 2024