By Justin Scheck
For years, big oil companies have been spending more money than
they bring in. With oil prices having more than halved since last
June, that is becoming an ever trickier way to run their
businesses.
The cost of developing new fields has ballooned over the past
decade, while investors have kept pressing for high dividends. The
result: Companies have spent more on capital costs and mollifying
investors than they reap in cash flow.
Now, companies like Exxon Mobil Corp., Royal Dutch Shell PLC and
BP PLC must decide whether to risk future earnings by cutting
developments, risk upsetting investors by cutting dividends, or
take on big debt in the hope that oil prices will soon recover.
The big companies have indicated they won't cut shareholder
payouts in the near future, but investors and analysts say they can
only weather low oil prices for so long.
"There is no doubt dividends are under serious threat," says
Michele della Vigna, an analyst with Goldman Sachs Group Inc. He
says oil companies will have to cut capital spending by 30% in
three years' time if oil settles at around $70 a barrel, if they
want to preserve their payouts. Brent crude fell by 0.8% to $50.69
a barrel on the ICE Futures Europe exchange on Wednesday, having
briefly traded below $50 a barrel for the first time since
2009.
Even when oil traded at over $100 a barrel in recent years,
major oil companies consistently needed to borrow to cover their
outlays.
A Citi Research analysis of 12 of the world's biggest
nonstate-owned oil companies says their cumulative spending on
dividends and capital investment--excluding certain
acquisitions--was 24% higher than their cash flow in 2013, and has
similar estimates for 2014.
Shell, for example, had $40 billion in net cash flow in 2013.
But, Citi says, Shell's capital spending and dividend payments
outstripped cash flow by 36%. Exxon's cash flow exceeded its
dividend and capital spending each year from 2008 to 2013, Citi
says, with the exception of 2009. But Citi estimates its
shareholder payouts and investment will exceed cash flow by 22% in
2015.
An Exxon spokesman said the company will lay out its capital
spending plans for 2015.
Shell Chief Executive Ben van Beurden has said in recent months
that last year's capital spending would be lower than 2013's. A
spokesman said the company has enough borrowing capacity to
maintain dividend and capital spending levels "for a reasonable
period of time." Shell's gearing--or debt as a percentage of the
company's capital--was 13% last year, Citi says. The company has
said it can afford to bring that number up to 30%.
BG Group PLC's dividend and capital spending exceeded cash flow
by 47% in 2013, Citi says, and estimates that number rose to 58%
last year. A BG spokesman said the company has finished large
projects responsible for "the biggest investment period in the
company's history."
Eni SpA's capital and dividend spending exceeded cash flow by
59% in 2013, Citi says, though it estimates that fell to 18% last
year. An Eni spokeswoman said the company has had a cost-cutting
plan in place since the summer.
BP's dividend plus capital investment last year was 2% higher
than its cash flow, according to Citi estimates. The bank expects
that number to rise to 24% this year. BP's chief financial officer
said last year said the company's "first priority within the
financial framework will always be to the dividend."
Using debt to cover dividend and capital investments isn't
necessarily a problem, especially given the current low interest
rates globally. That is the gamble that many companies took in
recent years, as they poured money into giant development projects.
And even now, the gearing for the world's four biggest
nonstate-controlled oil companies is below 20%, which analysts say
is a healthy level.
But while the need to borrow in past years came from a decision
to invest heavily in growth, borrowing in the near future will be
to make up for lost revenue from the oil price drop.
"It's a short-to-medium-term problem, so we're reassessing our
position on our holdings in the sector," says Richard Champion, the
chief investment officer at Sanlam Private Investments, which was
heavily invested in Shell and held shares in BP as of October.
He expects that if oil prices don't rebound in the next two
years, the big companies will have to either cut their dividends or
invest less in new projects, imperiling their output.
"These guys are in a really hard spot," he said.
Write to Justin Scheck at justin.scheck@wsj.com
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