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Big oil’s big payouts under strain as energy prices fall

2024 10 01T143045Z 2 LYNXMPEK901GL RTROPTP 4 OILMAJORS RETURNS

Published : , on

By Ron Bousso

LONDON (Reuters) – Major energy companies are set to borrow billions to maintain shareholder payouts or cut the rate of share repurchases in the face of a drop in oil prices after more than two years of bumper profits, analysts said.

The majors have for decades attracted investors by promising steady payouts even as the transition to lower carbon energy has cast doubt over the industry’s long-term prospects.

BP, Chevron, Exxon Mobil, Shell and France’s TotalEnergies have paid investors more than $272 billion in dividends and share repurchases since the start of 2022.

Energy prices surged after Russia invaded Ukraine in February 2022 and as the global economy emerged from the pandemic, generating record profits for the energy industry.

The payout has since been almost double the rate over the previous 10 quarters, Reuters calculations found.

But a drop in benchmark crude oil prices to below $70 a barrel last month, their lowest since late 2021, coupled with a sharp decline in profits for refining oil into fuels, is set to cut earnings in the coming quarters.

LOST YEAR?

Several banks have in recent weeks cut oil price forecasts in response to a weak demand outlook and trimmed profits forecasts for the sector.

“With moderating oil prices and weak refining margins, 2025 could be seen as a lost year for the sector,” RBC Capital Markets analyst Biraj Borkhataria said.

Exxon, Chevron, Shell and TotalEnergies are expected to hold share repurchases flat throughout next year, and Borkhataria said they may resort to borrowing money to cover shortfalls when interest rates are still high.

He said to maintain buybacks at their 2024 levels next year, based on RBC’s oil price forecast, Chevron would need to borrow next year $8.6 billion, Exxon $5.1 billion, TotalEnergies $5.6 billion, Shell $3.8 billion and BP $3.1 billion.

BP, which has higher debt than its rivals, is however likely to slow the pace of buybacks, while returns from Italian energy company Eni will depend on the scale of its asset sales, Borkhataria added.

“The difference in your ability to maintain the distributions is how strong your balance sheet is today, and how willing are you to re-lever in order to maintain distributions,” Borkhataria said.

UBS analyst Joshua Stone expects BP to cut its rate of buybacks to $4 billion in 2025 from $7 billion this year, based on an average crude price of $75 a barrel. Shell would reduce the rate of buybacks by $1.5 billion to $12.5 billion while TotalEnergies should be able to maintain its rate of $8 billion, Stone added.

“The reality is that buybacks should slow more materially if prices fall below $70 a barrel,” Stone said.

TOUGH CHOICES

In its second quarter results in August, BP said that in current market conditions it planned to buy back at least $14 billion through 2025 as part of its commitment to return 80% of surplus cash to shareholders.

With a net debt of $22.6 billion at the end of June and a market capitalisation of $85 billion, BP has the highest debt ratio among the oil majors, according to LSEG data.

A BP spokesperson said its returns guidance remains unchanged and that it maintains a disciplined financial frame.

Chevron, Exxon, Shell and TotalEnergies had no immediate comment when asked about their planned shareholder returns.

Some have already tapped into cash reserves to stick to their return promises. Chevron, for example, paid $6 billion to investors in the second quarter of the year, when its net earnings reached $4.4 billion while its debt rose by around $2.5 billion from the previous quarter.

Morgan Stanley analysts in late August lowered their earnings forecast for the sector saying “share buybacks are maxed out for now”.

Investment bank Jefferies lowered its oil price assumption for the remainder of 2024 and 2025 and said it expects the sector’s earnings to decrease by around 22% in the third quarter compared to the previous three months.

Companies will try to maintain returns by cutting spending, primarily on investments in low carbon energy, and by borrowing, Jefferies analyst Giacomo Romeo said.

“Companies will have to face some tough choices in the coming months if macro prices don’t recover,” he added.

 

(Additional reporting by Gary McWilliams; editing by Barbara Lewis)

Jesse Pitts has been with the Global Banking & Finance Review since 2016, serving in various capacities, including Graphic Designer, Content Publisher, and Editorial Assistant. As the sole graphic designer for the company, Jesse plays a crucial role in shaping the visual identity of Global Banking & Finance Review. Additionally, Jesse manages the publishing of content across multiple platforms, including Global Banking & Finance Review, Asset Digest, Biz Dispatch, Blockchain Tribune, Business Express, Brands Journal, Companies Digest, Economy Standard, Entrepreneur Tribune, Finance Digest, Fintech Herald, Global Islamic Finance Magazine, International Releases, Online World News, Luxury Adviser, Palmbay Herald, Startup Observer, Technology Dispatch, Trading Herald, and Wealth Tribune.

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