Energy prices are falling, putting pressure on big oil's huge payouts

Analysts said that major energy companies will borrow billions of dollars to maintain payouts to shareholders or reduce the rate of share purchases in response to a decline in oil prices following more than two years' bumper profits.

Since decades, the majors have attracted investors with their promises of steady payouts. However, the shift to low-carbon energy has cast doubt on the long-term prospects of the industry.

Since the beginning of 2022, BP, Chevron Exxon Mobil Shell, France's TotalEnergies, and Exxon Mobil have distributed more than $272 Billion in dividends and stock repurchases to investors.

After the Russian invasion of Ukraine in February 2022, and as the world economy recovered from the pandemic that followed, energy prices rose dramatically. This led to record profits for the industry.

Calculations have shown that the payout is now almost twice as high as it was in the 10 previous quarters.

The drop in crude oil prices, which dropped to their lowest level since late 2021 last month and a sharp fall in profits from refining the oil into fuels will likely lead to a decline in earnings over the next few quarters.

LOST YEAR -

In recent weeks, several banks cut their oil price forecasts due to a weakening demand outlook. They also lowered profit forecasts for this sector.

Biraj Borkhataria, an analyst at RBC Capital Markets, said that 2025 may be a year of loss for the oil and refining sector.

Borkhataria stated that Exxon Chevron Shell and TotalEnergies may borrow money to cover any shortfalls while interest rates remain high.

According to him, to keep buybacks in the same level as 2024, based on RBC’s oil price forecasts, Chevron will need to borrow $8.6 billion next year. Exxon, $5.1 billion; TotalEnergies, $5.6 billion; Shell, $3.8 billion; and BP, $3.1 billion.

Borkhataria said that BP's debt is higher than those of its competitors, but it will likely slow down the pace of the buybacks. The returns of the Italian energy company Eni depend on its scale of asset sales.

Borkhataria stated that the difference between your ability to maintain distributions depends on how strong your current balance sheet is and how willing you are to re-leverage in order to maintain them.

UBS analyst Joshua Stone predicts that BP will reduce its rate of buybacks from $7 billion to $4 billion by 2025, based upon an average crude oil price of $75 per barrel. Stone said that Shell's rate of buybacks would be reduced by $1.5 billion and to $12.5 billion. TotalEnergies, meanwhile, should maintain its rate at $8 billion.

Stone stated that "the reality is the buybacks will slow down more if oil prices drop below $70 per barrel."

Tough Choices

BP announced in its August second quarter results that it would buy back at minimum $14 billion in cash through 2025, as part of its commitment of returning 80% of excess cash to its shareholders.

According to LSEG, BP had the highest ratio of debt among oil majors with a net of $22.6 billion and a market cap of $85 billion at the end June.

A BP spokesperson stated that its return guidance is unchanged, and it maintains a financial framework of discipline.

When asked about their plans for shareholder returns, Chevron Exxon Shell and TotalEnergies did not respond immediately.

Some companies have already used their cash reserves to keep up with their promises. Chevron paid $6 billion in dividends to investors during the second quarter, when net profits reached $4.4 billion, while debt increased by $2.5 billion.

Morgan Stanley analysts lowered their earnings projections for the sector in late August, saying that "share buybacks have been maxed-out for now".

Jefferies, an investment bank, has lowered its oil prices assumption for 2024 and 2025. It also expects that the sector's earnings will decrease by 22% in the third-quarter compared to the prior three months.

Giacomo Romeo, an analyst at Jefferies, said that companies will cut spending and borrow to keep returns high.

He added that if macro-prices don't improve, "companies will be forced to make some difficult decisions in the months ahead."

(source: Reuters)