With cash flow declining, shareholder return pledges are now under strain
“The scales are tilting more bearish for oil prices as we look ahead,” said Noah Barrett, Denver-based lead energy research analyst at Janus Henderson, which manages about US$361 billion. “They’ll likely have to lean on the balance sheet if they want to maintain the current pace of buybacks.”
Exxon and Chevron have debt-to-capital ratios below 15 per cent according to data compiled by Bloomberg, well below their medium-term target range of 20 per cent to 25 per cent. That gives them plenty of room to borrow to fund buybacks.
The European majors have higher debt levels, allowing less room to maneuver. BP warned of rising net debt levels earlier this month despite already having the highest leverage ratio among its peers. The company is also the worst performing Big Oil stock this year, declining 13 per cent compared with a 2.3 per cent drop in crude.
Borrowing to buy back shares isn’t uncommon in the oil business. It can boost equity returns when stock valuations are low, avoiding the cyclical buyback trap of only purchasing shares when prices are high. But a dimming outlook for oil prices next year means the cash shortfall is apt to continue over the longer term.
OPEC recently cut its global oil demand forecast for the third time in as many months in part due to China’s economic slowdown. Despite its worsening outlook, the cartel plans to begin boosting supplies by 2.2 million barrels a day in monthly increments starting in December. Meanwhile, non-OPEC production growth is strong, particularly in the Americas. The U.S., Guyana, Canada and Brazil are on course to add nearly 1 million barrels a day in 2025, Barrett said.
Borrowing to fund buybacks “could be a good use of cash while companies have reasonably strong balance sheets,” Kim Fustier, head of European oil and gas equity research at HSBC Plc, said in an interview. “The question is, ‘how sustainable will it be?’”
Refining, which often helps keep earnings steady when oil prices drop, is also under pressure. Exxon, TotalEnergies, BP and Shell have all warned of falling margins at their fuel-making divisions globally in the third quarter, as demand for fossil fuels wanes and supply grows.
Chevron’s stock has trailed its U.S. rival this year after its US$53 billion deal to buy Hess Corp. stalled due to an arbitration battle with Exxon. Chief executive Mike Wirth will be keen to show its delayed and overbudget Tengiz project in Kazakhstan is on track for completion next year and provide an update on its Israeli gas operations, which have lost production time due to the ongoing conflict with Iran and its allies.
Investors will also be watching for the “continued normalization” of trading earnings, according to HSBC’s Fustier. It could become a “material headwind” for BP and Shell, which have historically derived large profits from the business, she said.
BP kicks off Big Oil earnings season on Oct. 29.