Oil’s collapse leaves the majors in need of a new pitch to investors

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Oil may float, but its days floating above slowing global demand growth appear numbered. After briefly dipping below $70 a barrel, it could sink further. That’s bad news for oil and gas companies, of course. But it leaves major European companies, whose stock appeal has focused largely on buybacks and dividends, needing a new selling point.

The main problem for oil is that consumption in China has actually started to decline, the impact of a weak economy exacerbated by the increasing penetration of electric vehicles and high-speed rail. That will translate into a global growth rate for this year and next of less than 1 million barrels per day, or less than 1 percent of global consumption, according to the International Energy Agency.

Such growing demand segments are easily filled by new oil coming into circulation in Brazil and Guyana and other non-OPEC producers. That leaves the cartel in an uncomfortable position: maintain its discounts and cede market share, or risk flooding the market. It is unlikely to choose production over price, as supply growth comes from cheap, long-cycle projects that could withstand the pain. But even assuming its members don’t break ranks, the threat of ample spare capacity that can be quickly brought back on line will keep a lid on oil prices.

That leaves the oil majors looking at prices that could average $10-15 per barrel lower than they did in 2023. A rough and ready rule of thumb could see cash flow declines of 0.50 dollars per barrel for every dollar lost to oil prices, Christopher believes. Wheaton to Stifel, that’s about $30 billion annually in the Big Five’s global upstream manufacturing portfolios. The impact of poor refining margins and potentially lower trading earnings from less volatile streams comes on top.

Declining cash flows will put a hole in the distribution policies of majorities. Most were paying more than half of their cash flows to investors in dividends and buybacks, according to Citigroup analysis. They will have much less to play with going forward. True, the group as a whole emerges from this oil bonanza with strong balance sheets. But raising leverage to fund buybacks would be a tough sell.

This leaves oil companies in need of a new story to tell investors. The problem is less acute for those companies – mainly in the US – that have considerable opportunity left in their core business. It’s useful to be able to point to the benefits of shale consolidation for Exxon or growth from new resources. But in Europe, where more capital is pouring into low-carbon businesses in the energy transition, the challenge of convincing investors that they have a profitable future has become even more pressing.

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