The largest publicly-traded oil companies in the world have been “living beyond their means” for years.
Since 2010, the five largest oil majors have spent vastly more than they have generated when including shareholder payouts. ExxonMobil, BP, Chevron, Total, and Royal Dutch Shell have dished out a combined $536 billion in dividends and share buybacks since 2010, a figure that far exceeds the $329 billion in free cash flow over the same period, according to a new report from the Institute for Energy Economics and Financial Analysis (IEEFA).
That comes out to a gap of $207 billion, or about 39 percent of the total that was given to shareholders. The shortfall had to be made up somehow. According to IEEFA, the oil majors bridged the gap by selling off assets and taking on debt.
“The oil majors are consistently under-performing the market and may believe that shareholders won’t notice, as long as they receive generous dividends,” said IEEFA director of finance and report co-author Tom Sanzillo. “As these companies continue to sell off assets and acquire more debt, they reveal a sector in disarray.”
ExxonMobil had the largest deficit, totaling nearly $65 billion. BP was in the hole by nearly $50 billion, but the others were not far behind – Chevron’s deficit hit $43 billion, Total’s was $27 billion and Shell was short by $22 billion.
“This practice reflects an underlying weakness in the fundamentals of contemporary oil and gas business models: revenues from the supermajors’ operations are not covering their core operational expenses and capital expenditures,” the authors wrote. “Generous dividends and share buybacks give companies the appearance of reliable blue-chip financial performance when, in this case, the opposite is true.”
The oil companies “seem like increasingly speculative investments,” they added.
It’s not that the oil majors are not profitable. It’s just that they are sending cash to shareholders at a rate that is not sustainable. There is tremendous pressure from Wall Street to never cutback on the payouts. In fact, they are under the expectation that dividends should increase over time.
For a while, the five companies have been selling off assets as a way of maintaining those payouts to shareholders. For example, Shell sold $68 billion in assets over the last decade, according to IEEFA. That will likely continue. “These moves are part of a broader industry-wide trend of raising cash by selling off poorly positioned or underperforming assets,” IEEFA warned.
But they also took on a whopping $122 billion in debt over the same timeframe.
Still, their stock performance – lagging badly behind the broader S&P 500 in recent years – reflects “decreasing investor confidence in the industry.” The focus on shareholder returns above all has not worked, in other words.
The gaping hole between the amount of money they are sending to shareholders versus what they are generating from their operations suggests this model cannot continue forever. However, any effort to restructure the arrangement with shareholders – cutting dividends, for example – is often met with a backlash from Wall Street. Without hefty dividends, holding the stock of an oil major becomes much less attractive. A few of them trimmed payouts during the depths of the oil market meltdown in 2015 and 2016, but quickly restored them in subsequent quarters.
The challenges going forward go beyond immediate cash flow concerns. In the medium- and long-term, the majors have to contend with climate change concerns, the loss of the social license to operate, and peak oil demand. To some degree, those risks are arguably already starting to show up in their share prices, although a much bigger reckoning still lies ahead.
By Nick Cunningham of Oilprice.com