The world’s largest oil companies are widely expected to start reporting this week profits for the first quarter of 2021 after a nightmare 2020 that forced some of them to cut dividends and saddled most with increased debt loads.
BP, Shell, Total, Exxon, and Chevron are all forecast to report strong cash flows this week thanks to the higher oil prices in Q1 compared to the average price last year.
Despite the expected significant improvement in cash flow generation, many investors are not convinced that Big Oil is a sound investment—neither in the short term nor in the long run.
The past year has shown how fragile the industry could become in case of sudden plunges in oil prices—for the second time in half a decade. The biggest international oil companies booked some of their largest quarterly losses, laid off tens of thousands of workers, and most European majors cut their dividends—in Shell’s case the first cut since World War II.
In 2020, the plunge in oil prices hit the upstream businesses, but the massive plunge in global fuel demand also hit the downstream businesses at the integrated oil majors, which couldn’t offset losses at one division with profits from the other. One of the few profitable businesses was oil trading during the highly volatile prices last spring.
As a result, debt levels rose at both those companies that cut dividends and at the few companies that maintained their dividend payout—Exxon, Chevron, and France’s Total. Related: Oil on Guard over Yemen as Saudi, Iran Meet in Secret
This year’s performance is forecast to be in stark contrast with last year’s losses. Big Oil is set for a cash flow bonanza, probably at record levels, as massive cost cuts in the wake of the 2020 crisis have significantly lowered the corporate cash flow breakevens for many firms, Wood Mackenzie said in research in February 2021.
But investors are concerned whether the world’s top international oil firms could keep the strong cash flow generation, considering the volatile oil prices, the uncertainties over long-term demand, and, of course, the impact of the energy transition and net-zero pledges on Big Oil’s returns on investment.
The expected extra cash flows this year are set to go to debt reduction first and increased shareholder returns next, the companies have signaled in recent communications to the market.
Shell, for example, said in February that it would target to reduce its net debt by around $10 billion to $65 billion.
On reducing net debt to $65 billion, Shell will target total shareholder distributions of 20-30 percent of cash flow from operations and will aim to increase shareholder distributions through a combination of progressive dividends and share buybacks.
BP said earlier this month it was on track to reach ahead of schedule its goal to cut net debt to $35 billion.
“Very briefly – the acceleration comes down to two things – money coming in from divestments earlier than we had expected and very strong business performance in the quarter. The strong performance is driven by trading, the price environment and resilient operations,” BP’s chief executive Bernard Looney said. Related: Brazil Reports 6% Oil Output Decline In Q1
BP is committed to returning at least 60 percent of surplus cash flow to shareholders via share buybacks, on which it will update the market as soon as on Tuesday, April 27, he added.
Some investors, however, question how long Big Oil could keep consistent shareholder policies given the track record from the past year and the fact that the companies’ financial fortunes are still closely tied with the price of oil.
“The key is consistency. We haven’t had any,” Christyan Malek, JPMorgan Chase’s head of EMEA oil and gas, told Bloomberg last week.
Others question the scale, commitment, and future returns from the numerous pledges of European oil majors to become net-zero energy businesses by 2050 or sooner.
BP’s Looney himself said earlier this year that investors were still coming to grips with the net-zero and green shift strategies of the major oil companies.
Some investors may never come to grips with how Big Oil could slash emissions and at the same time deliver shareholder returns from the still not-so-profitable low-carbon energy businesses.
But JPMorgan Chase’s chairman and CEO Jamie Dimon had a different message in his letter to shareholders with the annual report for 2020.
“We can agree on the need to make our energy system much less carbon intensive. But abandoning companies that produce and consume these fuels is not a solution. Furthermore, it’s economically counterproductive. Instead, we must work with them,” Dimon said.
By Tsvetana Paraskova for Oilprice.com
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