From Exxon Mobil Corp. to Total SA, the world’s largest listed oil companies have sent a message to skeptical investors and rivals at OPEC: we can get by in a world of $50 a barrel crude.
Big Oil generated a gusher of cash in the first quarter. The surge shows how a mix of cost-cutting and assets sales — plus the tailwind of new output from projects approved several years ago — helped companies to survive and then thrive with prices that are less than half what they were a few years ago.
“Oil majors have adapted to the low-price environment,” said Olivier Jakob, head of oil consultant Petromatrix GmbH in Zug, Switzerland.
Exxon, Total, Royal Dutch Shell Plc, BP Plc and Chevron Corp. reported combined first-quarter free cash flow — money they can use to pay dividends — of $11.4 billion, compared with a shortfall of $14 billion a year earlier, according to data compiled by Bloomberg. That puts their performance in the period on a par with what they often delivered between 2010 and 2014, when oil traded above $100.
Wall Street analysts and fund managers hailed the turnaround. Shell is a “cash machine,” said Jason Gammel at Jefferies Group LLC. “High dividend yields” are sustainable, said Simon Gergel of Allianz Global Investors. “Total free cash flow gets back to $100-a-barrel levels,” added Alastair Syme of Citigroup Inc.
Time to Buy
“Right now is the time to start increasing exposure to Big Oil,” said Danilo Onorino, portfolio manager at Dogma Capital SA in Lugano, Switzerland. “You buy upside to oil prices, and cash generation is again strong.”
For the Organization of Petroleum Exporting Countries, the oil majors’ comeback is a painful reminder that corporations can impose austerity by firing workers and cutting projects a lot easier and faster than governments can adjust their budgets.
In Saudi Arabia, the world’s largest oil exporter, King Salman restored bonuses and allowances for state employees last month, scaling back an austerity program that generated criticism among citizens accustomed to generous government handouts. Almost three years into the oil slump, the kingdom still needs $83 crude to balance its budget, according to the International Monetary Fund.
While OPEC, Russia and their allies consider whether to extend their output cuts for another six months in order to eliminate a global inventory surplus, their rivals are starting to invest in new production. After slashing spending in 2015 and 2016, companies are taking advantage of cheaper drilling rigs and other equipment in an effort to boost — albeit rather timidly — oil and gas production.
Total, based near Paris, gave the green light to its first big project since oil prices crashed in 2014 — a venture in Argentina’s Vaca Muerta shale formation. Irving, Texas-based Exxon announced a $2.8 billion investment in a liquefied natural gas project off Mozambique and a $6.6 billion deal to become a large player in the red-hot Permian shale basin last quarter.
Despite the improvement, the major oil companies aren’t yet free of their troubles, and probably won’t be until oil prices rise to $60. On Friday, West Texas Intermediate slid below $45 a barrel for the first time since OPEC agreed to cut output in November.
While stronger cash flow may dispel worries that dividends — a staple of many pension funds — are safer than they were a year ago, some companies aren’t yet able to fully cover shareholder payouts.
Chevron, for example, generated $3.9 billion of cash in the first quarter. The San Ramon, California-based company spent $3.3 billion on new projects, leaving just $600 million to cover the $2 billion it paid to shareholders. It bridged the gap taking on debt and selling assets.
The five companies’ net debt remains near an all-time high, having doubled to $210 billion over the last two years. Clearing that burden may require more asset sales, or keep executives cautious about investing in new projects to guarantee future supply — something that could endanger profitability several years from now.
Yet, after enduring the deepest slump in a generation, executives are painting an upbeat picture.
“Our numbers show we had strong earnings at a $54 oil price in the last quarter,” Shell Chief Financial Officer Jessica Uhl said on a conference call on Thursday. “We’re clearly reshaping the company to be resilient in a low-price environment.”