Are low oil prices jeopardizing Big Oil shareholder payouts?

The world’s biggest international oil companies have enjoyed sizable gains over the past two years as oil prices have risen amid supply concerns. Now that the market has focused on demand concerns, oil prices have fallen in recent months, denting Big Oil’s earnings.

Record profits in 2022 and strong earnings in 2023 have allowed the top majors – ExxonMobil, Chevron, BP, Shell and TotalEnergies – to boost shareholder payouts through dividends and share buybacks.

But with oil below $80 a barrel in recent weeks and lingering concerns about global oil demand, analysts have begun to question Big Oil’s ability to maintain its generous shareholder returns of the past two years.

Lower oil prices will lead to lower earnings for Big Oil. They will, however, seek to at least maintain current shareholder payouts, which have drawn some investors back into the sector after several years of ESG-related backlash against oil companies.

Back to basics

In the wake of the 2022 energy crisis, European majors Shell and BP, which had just shifted to greater investment in renewable energies, returned to their core business of producing oil and gas and helping consumers with energy security.

The supermajors have defended their strategies to keep producing more oil and gas because demand for fossil fuels isn’t going away anytime soon. The return to the core business was encouraged by shareholders, who saw the oil and gas business still offering higher earnings and return on investment than renewable energy.

Related: Oil surges 4% amid talk of Israeli attack on Iranian oil and gas

More than anything, shareholders have applauded the growing payouts that Big Oil has been able to dish out over the past two years.

In light of these shareholder views, the oil supermajors have no choice but to satisfy investors with dividends and buybacks.

However, this year’s low oil prices are spoiling Big Oil’s party. Third-quarter earnings are set to fall from the second quarter due to a drop in oil prices, while lower refining margins could add more insult to the damage of integrated oil companies.

Dilemmas of the financial framework?

The five largest international oil companies have distributed a total of more than $272 billion in shareholder payouts — dividends plus share buybacks — since the start of 2022, according to estimates by Ron Bousso of Reuters.

To maintain those levels of payouts for investors, Big Oil needs Brent crude prices to be at least $80 a barrel, according to RBC Capital Markets research cited by Reuters.

Even with a high geopolitical risk premium from the latest Israel-Iran conflict in the Middle East, Brent crude oil prices traded below $75 a barrel on Thursday morning, capped by concerns about weaker demand and expectations of a increase in supply from OPEC+ since the very beginning of the year. December.

Analysts and investment banks have revised down their oil price forecasts in recent weeks, citing concerns about demand and fears of oversupply. Some have lowered their estimates of Big Oil’s profits.

Morgan Stanley, for example, cut its price targets on major European stocks in August, expecting falling profits to pressure companies as they try to maintain shareholder payouts. Analysts at the investment bank said “share buybacks are at an all-time high” in a research note published by the Financial Times.

According to analysts, companies may have to either slow and/or reduce share buybacks or start borrowing again to cover shareholder payouts.

“The difference in your ability to maintain distributions is how strong your balance sheet is today and how willing you are to retool to maintain distributions,” RBC Capital Markets analyst Biraj Borkhataria told Reuters.

Big Oil maintains investor guidance

To be fair, none of the oil companies hinted at slowing or declining shareholder returns despite the drop in oil prices in the third quarter.

In the second quarter, cash flow generation remained strong and companies announced additional share buyback programs.

“Our decision to increase our dividend by 10% and extend our buyback program commitment to Q4 2024 reflects the confidence we have in our performance and cash generation prospects,” said BP’s chief financial officer, Kate Thomson in July’s Q2 earnings release. .

“We maintain a disciplined financial framework and remain committed to increasing value and returns for bp.”

Shell CEO Wael Sawan said in the quarterly results presentation, commenting on yet another share buyback scheme: “This makes it the 11th consecutive quarter that we have announced buybacks of $3 billion or more , showing that strong business performance results in compelling returns for our shareholders.”

France’s TotalEnergies made its latest comment on shareholder returns when it unveiled its strategy and near-term outlook on Wednesday.

TotalEnergies’ Board of Directors has confirmed a shareholder return (dividends plus share buybacks) of over 40% of cash flow through cycles.

The company confirmed its plan to execute $8 billion in share buybacks this year, with an anticipated return to shareholders of more than 45% of 2024 cash flow.

In 2025, TotalEnergies plans to continue share buybacks of $2 billion per quarter, “assuming reasonable market conditions,” and increase the dividend per share by at least 5% based on share buybacks in 2024.

The oil majors are maintaining their shareholder return policies for now, but could face some financial dilemmas if oil prices fall further and remain depressed for a longer period of time.

By Tsvetana Paraskova for Oilprice.com

More top reads from Oilprice.com