(Bloomberg) – It was Andrew Swiger, Chief Financial Officer of Exxon Mobil Corp., who summed up the stance of the entire industry following the end of Big Oil and reported another dire set of quarterly earnings: “Prices must rise.”
After months of low oil and gas prices fueled by weak demand, the world’s largest international oil companies have largely exhausted their financial defenses and left little headroom if they receive further blows. Exxon Mobil Corp., Chevron Corp., Royal Dutch Shell Plc, Total SE and BP Plc have likely already cut spending as much as possible for 2021.
With the exception of Chevron and Total, which have entered the downturn with the strongest balance sheets, leverage is nearing uncomfortable levels. Taken together, Big Oil is now completely at the mercy of a global decline in fuel demand that is showing no sign of easing without a Covid-19 vaccine, as have OPEC + leaders Saudi Arabia and Russia.
“I will say that much of the company’s performance today and in the future depends on the macro-environment we enjoy or will suffer from,” said Ben van Beurden, CEO of Shell.
Brent crude closed below $ 38 a barrel this week, bringing the year down to 43%. At this level, the industry invests so little in supply that future bottlenecks are inevitable, which means higher prices, argued Exxon’s Swiger. A price recovery, however, depends on two other factors: higher demand and the fact that OPEC + is holding production restrictions, which is underpinned by the often uncomfortable alliance between Russia and Saudi Arabia.
With U.S. Covid-19 cases hitting a record this week and new lockdowns looming across Europe, the virus and its impact on oil demand are showing no signs of easing. And despite brainstorming from executives from Dallas to Paris, the oil super majors account for less than 15% of global oil demand before the pandemic. If supply discipline is to be successful, national oil producers must work together in the heavyweight division, and Crown Prince Mohammed bin Salman and President Vladimir Putin must continue to get along.
One bright spot is US shale production, which is free after a decade-long, debt-driven surge that took the super majors by surprise and loosened OPEC’s power over the oil market. Executives at some of the largest independent U.S. oil producers believe America may never return to the peak production it saw earlier this year and that further declines are likely in 2021.
Big Oil CEOs can do little to foster geopolitical collaboration, but for the past six months they have been pulling out all the stops to stop the cash bleeding. Or, in company jargon, they have concentrated on self-help: curbing unprofitable production, reducing expenses and future investments, and laying off tens of thousands of employees.
Exxon is a paradigm for the problems the super majors find themselves in. A year ago, the Texas-based company had targeted investments of up to $ 35 billion in 2021. Now it is planned to spend half of it. This week, she announced that she will reduce her employees and contractors by 15% or 14,000 employees by 2022. Even then, Exxon is spending more than it deserves, as capital and dividend expenses consume all of the cash from operations.
Many in the market think the situation is unsustainable, and if prices don’t rise, Exxon will have to give way and cut its dividend for the first time in more than four decades. “The message is clear: equity needs protection from higher oil prices,” said Alastair Syme, a London-based analyst at Citigroup Inc.
Shell and BP cut their dividends earlier this year but are still burdened by heavy debt. Shell outlined its intention to increase its payout this week. However, this would require higher oil prices and decades of small increases to reach earlier levels.
The cost reduction appeared to bear fruit in the third quarter, as four of the five major Western majors turned in adjusted profits. But you can only cut so far.
For example, Chevron plans to invest just $ 14 billion over the next year, even after it recently bought Noble Energy Inc. This is not far above the $ 10 billion level the company has historically identified as the minimum to keep production going. CFO Pierre Breber said the company would drop oil volumes if it made financial sense. “We’re not trying to keep short-term production going,” he said.
The question is not whether big oil will survive, but whether investors can still care. BP and Shell are no longer the dividend hubs of European equity markets. Exxon, the profit powerhouse that dominated the top spot in the S&P 500 index for years, is now outside the top 50. Energy is now worth about 2% of the S&P 500 index, which is why there is a rounding error in portfolios many general fund managers do.
“Making energy relevant and reinvestable is the million dollar question,” said Jennifer Rowland, a St. Louis-based analyst with Edward Jones. “You’re still trying to find out.”
For Rowland, having a compelling strategy in a low-carbon future is key. While this gives an edge to Europeans who pledge net-zero emissions by mid-century, unlike Exxon and Chevron, BP and Shell still need a rebound in their traditional businesses to fund the move, Rowland said. With less money, a green pivot becomes more difficult.
Exxons Swiger believes prices will rebound. Things are so bad that oil, refinery and chemical prices are “at or well below the bottom of the cycle,” he said. Whether big oil investors are willing to wait for this forecast to be fulfilled remains to be seen.
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