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(Bloomberg) – It was Andrew Swiger, chief financial officer of Exxon Mobil Corp., who summed up the attitude of the whole industry after Big Oil stopped releasing another dismal set of quarterly results: “The prices will have to increase. “
After months of low oil and gas prices due to weak demand, the world’s largest international oil companies have largely exhausted their financial defenses, leaving little wiggle room in the event of further blows. Exxon Mobil Corp., Chevron Corp., Royal Dutch Shell Plc, Total SE and BP Plc have already cut 2021 spending probably as much as possible.
With the possible exception of Chevron and Total, which entered the recession with the strongest balance sheets, leverage is approaching uncomfortable levels. Together, Big Oil is now completely at the mercy of a global fuel demand rout that, in the absence of a Covid-19 vaccine, shows no signs of slowing down, along with OPEC + leaders , Saudi Arabia and Russia.
“I will say that a large part of the performance of the company today, but also in the future, will depend on the macro environment that we will benefit or suffer as the case may be,” said Ben van Beurden, director General de Coquille.
Brent closed this week below $ 38 a barrel, bringing the year’s decline to 43%. At such levels, the industry under-invests in supply to such an extent that shortages are inevitable in the future, which means higher prices, Exxon’s Swiger argued. But a price recovery hinges on two other things: higher demand and OPEC + holding the line on production brakes, underpinned by the often uncomfortable alliance between Russia and Saudi Arabia.
As cases of Covid-19 in the United States hit a record high this week and new lockdowns loom across Europe, the virus and its impact on oil demand show no signs of slowing down. And despite all the brainstorming of leaders from Dallas to Paris, the oil supermajors represent less than 15% of the global demand for pre-pandemic oil. For the discipline of supply to be successful, major national oil producers will need to work together, and Crown Prince Mohammed bin Salman and President Vladimir Putin must continue to get along.
One bright spot is shale production in the United States, which is free after a decade-long debt-fueled surge that has surprised the supermajors and released OPEC’s power in the oil market. Executives at some of America’s largest independent oil producers believe America may never return to the peak production seen earlier this year and further declines are likely in 2021.
There is little that Big Oil CEOs can do to foster geopolitical cooperation, but for the past six months, they’ve pulled every possible lever to stop the cash drain. Or in corporate jargon, they’ve focused on self-help: cutting unprofitable production, reducing expenses and future investments, and laying off tens of thousands of employees.
Exxon is the paradigm of the problem that supermajors find themselves in. A year ago, the Texas-based company was targeting 2021 capital spending of up to $ 35 billion; now he plans to spend half. It announced this week that it would cut its staff and contractors by 15%, or 14,000 people, by 2022. Even then, Exxon is spending more than it earns, spending on capital and in dividends consuming all of its operating cash flow.
Many in the market believe the situation is unsustainable, and if prices do not rise Exxon will have to give in and cut the dividend for the first time in more than four decades. “The message is clear: stocks need the protection against rising oil prices,” said Alastair Syme, London-based analyst at Citigroup Inc.
Shell and BP cut dividends earlier this year, but are still weighed down by high debt levels. Shell has underlined its intention to increase the payment this week. Still, it would require higher oil prices and decades of small increases to reach previous levels.
The cost reduction appeared to bear fruit in the third quarter, with four of the five major Western majors posting profits on an adjusted basis. But they can only cut so far.
Regain relevance
Chevron, for example, plans to invest just $ 14 billion next year, even after it recently bought Noble Energy Inc. That’s not well above the $ 10 billion level the company has historically said. be the minimum to support production. CFO Pierre Breber said the company would let oil volumes drop if it made financial sense. “We are not trying to support production in the short term,” he said.
The question is not whether Big Oil will survive, but whether it can still grab the attention of investors. BP and Shell are no longer the pillars of the European stock market dividend. Exxon, the profit powerhouse that dominated the top spot in the S&P 500 Index for years, now ranks outside the top 50. Energy is now worth around 2% of the S&P 500 Index, making it a rounding error in the portfolios of many generalist fund managers.
“Making energy relevant and investable again is the million dollar question,” said Jennifer Rowland, analyst at St. Louis-based Edward Jones. “They’re still trying to figure this out.”
For Rowland, having a compelling strategy for a low-carbon future is essential. While this gives an advantage to Europeans, who promise net zero emissions by mid-century, unlike Exxon and Chevron, BP and Shell still need a resumption of their traditional businesses to fund the move, said Rowland. With less money, a green pivot becomes more difficult.
Exxon’s Swiger is confident that prices will recover. Things are going so badly that prices for oil, refining and chemicals are “at or well below cycle conditions,” he said. It remains to be seen whether Big Oil investors are prepared to wait for this forecast to materialize.
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