Big Oil Is Set For A Break Out

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By Tsvetana Paraskova

Oil majors began to reap the benefits of the higher oil prices and lower costs as early as last year when they started reporting growing profits and improved cash flows.

Now they are earning as much income as they did in the middle of 2014, when oil prices were $100 a barrel.

The first of the international oil majors to report Q1 2018 financials this earnings season—Statoil (NYSE:STO)—set the pace with the highest earnings since the second quarter of 2014, just before the oil prices crumbled.

The Norwegian oil major attributed the increase in its Q1 2018 earnings to higher oil prices and higher production volumes. Statoil beat expectations on cash flow—the metric that analysts are closely watching in the oil industry.

Despite earning profits like it’s early 2014, the Norwegian group is strictly sticking to its capital expenditure (capex) guidance of US$11 billion for 2018, the same figure it announced in January, despite the clear temptation to boost capex with oil prices being so high.

There is growing pressure in the oil industry for companies to keep momentum and keep costs down, and Statoil will be doing that, president and chief executive officer Eldar Sætre told Bloomberg in an interview right after the results release on Wednesday.

Statoil reported Q1 adjusted earnings after tax of US$1.473 billion, up by 32 percent compared to Q1 2017, driven by higher prices for both oil and gas, coupled with high production volumes. That’s the highest level of earnings at Statoil since Q2 2014.

Production also increased, to 2.18 million barrels of oil equivalent per day from 2.146 million boepd in Q1 2017, mostly thanks to higher production in the United States.

Cash flow from operations before taxes increased to U$7.1 billion this past quarter, from US$5.9 billion for Q1 2017. The cash flow figure was “very solid” and “a 28 percent beat compared to our estimates for the quarter,” Danske Bank A/S analyst Anders Holte said in a note, as carried by Bloomberg.

Statoil is proposing a dividend of US$0.23 per share for Q1, the same as for Q4 2017. In February, the Norwegian oil major proposed to increase the dividend by 4.5 percent to US$0.23 per share. Apart from deciding to lift the dividend, Statoil also ended—as planned—its scrip dividend program in the third quarter of 2017, joining the bigger European oil majors like BP and Shell who also ended their scrip plans under which shareholders could choose to be paid in shares instead of in cash.

On Thursday, Shell (NYSE:RDS.A) also reported surging Q1 profit on the back of higher oil prices, with current cost of supply (CCS) earnings—its proxy figure for net income—soaring 42 percent year on year. Cash flow from operations, however, was a bit lighter than analyst had expected.

Also on Thursday, France’s Total (NYSE:TOT) lifted Q1 oil and gas production to a record, up 5 percent from Q1 2017, beat adjusted net income estimates after posting a 13-percent increase to US$2.9 billion, raised interim dividend by 3.2 percent, and bought back all shares issued in Q1 as scrip dividend to eliminate dilution and repurchased additional shares to “return to shareholders some benefit resulting from higher oil prices.”

The other European oil major, BP, is scheduled to report Q1 results on May 1, while the two U.S. supermajors, Exxon and Chevron, are reporting on Friday, April 27.

The oil majors are riding the higher oil prices and most of them are boosting their bottom lines and cash flows. Most are also keeping strict capex discipline—except for Exxon which has bet on aggressive investment and growth – aiming to double earnings and cash flow by 2025.

Now that profits back at 2014 levels, all of the majors face another difficult task—convince shareholders that their stocks are worthwhile investment cases—or as Shell’s CEO Ben van Beurden has put it for the company he leads, a “world-class investment case”—amid the ‘peak oil’ and ‘energy transition’ narratives.

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