By Irina Slav
Good news is flooding into the oil and gas industry, it seems. After reports of higher exploration budgets and various discovery announcements, here’s more: Big Oil’s total free cash flow this year could hit US$175 billion, Rystad Energy has estimated, as quoted by Bloomberg. That’s five times what the supermajors made in the previous five years combined, which should impress investors, according to Bloomberg.
Indeed, Big Oil has been lagging behind crude oil benchmarks in terms of price improvements. While Brent and WTI have climbed substantially over the past 12 months, the stocks of the biggest oil companies in the world have risen only modestly. They have also lagged behind stock indices in the United States, Bloomberg’s Kelly Gilblom notes.
Could piles of free cash flow change investors’ minds? Only if they are accompanied by a lot more in other departments, seems to be the answer. The cash on its own has to be sustained, and it can’t be sustained if prices start falling, which will happen sooner rather than later what with India and the United States complaining about them being too high.
What’s more, despite headwinds such as Hurricane Michael, which will only have a short-lived effect on prices, the IMF just this week applied a considerable amount of downward pressure on the benchmarks after it revised its outlook for the global economy, with analysts noting that a slowdown in growth could put a strain on oil and oil products demand.
But let’s set free cash flow aside. Spending is also still a problem for investors. They simply don’t seem convinced that Big Oil can maintain the strict financial discipline it was forced to adopt during the downturn. And they have a pretty good reason to be suspicious: the cyclical nature of the commodity industries has given them enough historical evidence that proves pledges to maintain strict financial discipline in a period of recovery do not last.
Yet it would be unfair to say all investors are champions in grudge-holding. Investors do appreciate the results of a frugal approach to spending. ConocoPhillips is a case in point here. The company earlier this year became the best-performing Big Oil stock in the United States as it began buying back shares, assuring its shareholders it will focus on returns and not growth.
Yet Conoco is one single case. Overall, investors have remained skeptical about Big Oil’s promises of sustainable growth and continued frugality. In fact, some of them do not want this frugality any longer. Reuters reported last week that big oil companies’ boards are under increasing pressure to boost spending, expand production, and increase reserves. That’s just three years after everyone in oil woke up to the fact that Brent was going nowhere but down for a while longer and belts started tightening. Now, with Brent hovering around US$85, these belts are getting too tight.
So, on the one hand, we have suspicious investors biding their time to start buying Big Oil again, once they make sure it will not start splashing money on projects with questionable periods and rates of return. On the other, we have existing shareholders who are eager to ride out the wave of higher oil prices, urging this same Big Oil to spend more. Big Oil must be having a hard time trying to please two so very different groups.