Majors rolling in cash, so why don't CEOs want to spend?
PARIS, ROME and NEW YORK (Bloomberg) -- The oil industry is rolling in cash again, but it’s not time for a party. Instead company bosses are vying to show the most monk-like devotion to austerity.
Third-quarter earnings season started with Equinor CEO Eldar Saetre’s promise to “take good care of our cash” even as profit rose to a four-year high. His counterpart at Total, rugby fan Patrick Pouyanne, gave a stout commitment to “resolutely” cut costs. Staying “laser-focused on discipline” was ConocoPhillips CEO Ryan Lance’s principal vocation.
Analysts are forecasting record cash flows for the industry this year thanks to the surge in crude prices, and so all major companies are exceeding those estimates. Yet so far, most CEOs -- such as Eni boss Claudio Descalzi who used $1.1 billion of surplus cash to pay down debt -- show no sign of being more generous with either spending or shareholder payouts.
Oil companies “want new projects to be resilient, because oil prices will fall back as it’s a cyclical market,” said Ahmed Ben Salem, an analyst at Oddo Bhf in Paris. “They want to reassure investors, who remain wary that risks of rising capex would jeopardize share buybacks.”
There are plenty of reasons to stay cautious in a market that remains uncertain and volatile. Since Brent crude’s rally to $86/bbl earlier this month, it’s dropped about $10 due to concerns over demand.
These gyrations reflect risks to both supply and demand that are too big even for giants like Total or Eni to manage: From the slump in global equity markets to signs of weakness in the global economy; from the collapse of Venezuela’s oil industry to U.S. efforts to sanction Iran’s crude exports out of existence.
Oil bosses are also keen to avoid falling into the cost inflation trap that often accompanies recovering prices. Saetre, who has led Equinor for four years, has vowed not to forget the lessons of the last boom, when much of the gains from $100/bbl crude were eaten up by the rising cost of drilling, raw materials and wages.
This restraint probably won’t last forever, especially with investors keen for higher returns, but the oil majors should be able to afford it. For the next three years production will grow while costs and prices remain stable, said Oswald Clint, an analyst at Sanford Bernstein Ltd.
“This is really a sweet spot for integrated oil,” said Alessandro Pozzi, an analyst at Mediobanca SpA in London. “They are all likely to increase shareholders returns through higher dividends and buy-backs in the coming quarters.”
Here’s a breakdown of major oil company earnings so far. BP, Exxon Mobil, Chevron and Royal Dutch Shell report next week:
Total’s profit surged by more than expected as rising prices combined with record production. The French company can afford a little moderation in spending because it’s still enjoying the growth benefits of a series of acquisitions and new projects.
Eni’s cash flow from operations doubled from a year earlier to a record $4.7 billion. For now, the company left its dividend and capital expenditure plans unchanged and used its surplus cash to pay down debt.
ConocoPhillips, the largest independent explorer, trounced analysts’ estimates. It did raise its full-year spending estimate by 1.7% to $6.1 billion, citing decisions outside its control such as drilling partners expanding operations.
Equinor cut planned investments for 2018 to $10 billion from $11 billion, maintained a dividend of $0.23, in line with earlier promises, and made no mention of a potential share buy-back program it’s been considering.
