Are Oil Majors Facing A Terminal Decline?

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By Nick Cunningham – Oilprice.com

Four other oil majors – Chevron, BP, Shell and Total – also declined sharply, dragged down by the worst weekly loss for oil prices in more than four years.

But the problems for the oil majors run much deeper than the coronavirus, and their share price declines have been underway for quite some time.

The majors find themselves facing a complex set of problems, with no clear way out. Oil demand growth in the short run has vanished, but in the long run peak demand looms. Prices have been stuck at low levels, but returns for the majors were disappointing even prior to the 2014 meltdown. Many of them have bet big on U.S. shale, even as the business model remains unproven. A decade of negative cash flow on shale drilling raises serious red flags about the financial viability of the entire fracking enterprise.

In the past, continuous growth was the business model. More spending and more exploration in order to find more reserves, which translated into a larger production portfolio. Investors have completely soured on this strategy, and companies are increasingly hiking dividends and share buybacks to keep shareholders from abandoning them. ExxonMobil finds itself somewhat alone in sticking with the old strategy of aggressive growth.

But dishing out more money to shareholders and forgoing growth presents a new set of challenges for an industry premised on endless growth. The dramatic decline in energy share prices likely reflects a growing belief from Wall Street that oil and gas companies are going to struggle with a low-carbon transition. Related: The Complete Guide To FID’s

The European majors are trying to make the pivot, with BP, Shell and Total announcing varying degrees of climate targets. Eni just announced that its oil and gas production would peak in 2025.

None of the strategies seem to be working and all of the oil majors are struggling. Collectively, they are now spending much less than in the past, but that too is a sign of decline, according to a new report.

“In 2019, the five largest integrated oil and gas companies—ExxonMobil, Shell, Chevron, Total and BP—spent a total of $88.7 billion on capital projects, down nearly 50 percent from the $165.9 billion they spent in 2013,” a report from the Institute for Energy Economics and Financial Analysis said. “Not since 2007 have the capital expenditures, or capex, among the five companies been so low.”

The majors have slashed spending in order to limit the damage to their balance sheets, but low capex is a “warning to a mature industry with declining prospects in its traditional businesses – oil and gas exploration and production, refining and petrochemicals,” the report said.

Capex is a “crucial gauge” for how companies view their future growth prospects, the analysts wrote. But a “convergence of trends” has squeezed them. Related: U.S. Gasoline Prices Jump On Outages At Major Oil Refineries

These trends include weaker growth prospects, including the “elusive” belief that petrochemicals offer the next big growth sector. They have less cash than they used to, due to lower oil and gas prices.

Replacing reserves is no longer the preferred metric by Wall Street. Instead, investors want cash flow, something that the majors are also struggling with.

Meanwhile, the majors collectively rewarded shareholders with $536 billion in dividends and share buybacks over the past decade, while only generating $329 billion in free cash flow. They have had to sell assets and take on debt to make up for the shortfall.

In addition, the energy sector is declining more broadly in importance, representing a much smaller slice of the S&P 500 than it used to. “Simply put, a declining industry requires less capex,” the IEEFA analysts wrote.

The oil and gas industry “has reached a mature and declining phase, with a weak financial outlook,” IEEFA concluded.

 

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