It seems the oil supermajors have finally managed to turn the corner after being hit by the industry downturn for three years. Recovering commodity price and successful cost-cut strategies adopted during the slump period helped them deliver stellar results.
Rebounding Oil & Cost Cuts Drive Oil Majors
Following the supply glut and lackluster global demand, oil prices remained low for more than three years. From 2014, crude oil went from over $100 a barrel to under $30. However, the market has recovered from these historic lows with prices finally rebounding to more than $50 a barrel. Recently, crude prices reached a more than two-year high of above $57. The commodity pricing environment has been improving, courtesy of tightening supplies, rising demand and OPEC-deal extension talks.
The direct impact of strengthening crude was visible on the oil majors, which also reaped benefits of cost-containment strategies adopted during the historic downturn period. They focused on realigning their business models to a more leaner and efficient structure so as to stay competitive in the long run. The companies engaged in reducing headcount, streamlining operations, divesting non-core projects, slashing dividends, capex and operating costs to adapt to the weak pricing environment and bolster their financials.
With cost reductions combined with the price recovery, major oil firms ExxonMobil Corp. (XOM - Free Report) , Chevron Corp. (CVX - Free Report) , BP plc (BP - Free Report) , Royal Dutch Shell (RDS.A - Free Report) and TOTAL S.A. (TOT - Free Report) — collectively known as ‘Big Oil’ — successfully came out of the slump. Each of these companies surpassed earnings estimates in third-quarter 2017 along with recording year-over-year improvement in both the top and bottom line.
Exxon, Chevron, BP, Shell and TOTAL Report Jump in Profits
With commodity prices on their way up, the world’s largest publicly traded oil company, ExxonMobil reported net earnings of $11.3 billion in the first nine months of 2017, up 84% from the year-ago corresponding period income of $6.2 billion. Smaller rival Chevron posted net earnings of around $6.1 in the said time frame as against the net loss of $912 million reported in the corresponding period of 2016.
British energy giant BP posted earnings of $3.4 billion as against net loss of $382 million recorded in the corresponding period of 2016, while Anglo-Dutch super major Shell reported earnings of around $11.5 billion — a whopping 113% surge compared with the year-ago period. France’s TOTAL reported net income was $7.7 billion, up 31% from the year-ago period.
Strong Cash Flow from Operations
During the last nine months, the Big Five oil companies reported a sharp year-over-year increase in cash flow from operating activities, which is a key metric to gauge the financial health of the firms. The companies generated enough cash to pay off debt along with funding capex and dividend payments.
BP generated operating cash flow of $13 billion in the first nine months of 2017 as against $8.3 billion reported in the corresponding period of 2016. Chevron reported $14.3 billion in cash flow from operations, up from $9 billion in the year-ago period.
TOTAL witnessed a more than 24% year-over-year increase in cash flow from operations, which stood at $15.2 billion in the first nine months of 2017. ExxonMobil generated $24.4 billion in cash flow compared to $16.9 billion recorded in the year-ago period. Shell generated cash flow from operations of $28.4 billion, up 148% from the $11.4 billion recorded in the corresponding period of 2016.
The improvement in the underlying pattern of income and cash flow emphasize the strength of the integrated model of the super-majors. Following strong third-quarter results, the Zacks Industry Rank for Oil and Gas - Integrated - International stands at #22 (Top 9%). While Chevron, BP and ExxonMobil carry a Zacks Rank #2 (Buy) each, Shell and TOTAL carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Big Five Business Model Adapting with $50 Crude
The robust cash flows and the solid Zacks Rank underscore the fact that the super-majors can not only survive but also flourish at $50 a barrel. The remodelling of portfolio and strategies has made these firms way more resilient to reduced crude prices, thus achieving break-even at $50 a barrel or even lower.
Break-even price is one of the popular metrics to determine the success of oil companies. It indicates the oil price which a company requires to generate enough cash to meet its dividend and capex requirements.
Notably, Shell has reduced its break-even point to $47 a barrel currently, reflecting a 60% decline from the $120 a barrel threshold in 2013. BP recently stated that it has managed to achieve break-even at $47 a barrel as against $60 earlier this year, with further reduction plans in store. The company currently targets to achieve break-even at $35-$40 per barrel by 2021. The remaining super majors have also successfully lowered their break-even price to around $50 a barrel.
Dividend Payout Pressure to Ease
As low oil prices over the past three years weighed on the energy companies' top and bottom lines, the industry was forced to chalk out new strategies to shield their dividends and balance sheet. Players that focus more on exploration and production activities including Texas-based ConocoPhillips (COP - Free Report) , Spain’s Repsol SA (REPYY - Free Report) , and Italian oil giant Eni S.p.A. resorted to dividend cuts to shore up their financials.
Meanwhile, the super-majors held up far better though the likes of BP, TOTAL, Shell, Statoil, etc started offering scrip dividends to shareholders, instead of full-cash dividends. ExxonMobil suspended its share repurchase program amid cataclysmic energy-price scenario. Though it did not resort to dividend cuts, the company’s dividend growth rate has been lacklustre.
However, with recovering energy landscape and improving financial picture of the companies, super-majors are likely to abandon their scrip dividend program. After reporting robust third-quarter results, BP announced plans to call off its scrip dividend and resume share buyback programs.
On the other hand, TOTAL is set to do away with the discount it gives on the scrip option in 2018 following the strongest quarterly earnings in the last two years, pointing to brighter prospects and improving cash flow generation. Statoil also announced to re-start paying full cash dividends from the next quarter, putting an end to its two-year scrip program. The CFO of Shell also reaffirmed the company’s priority to slash debt and cancel the scrip dividends.
Big Oil continues to benefit from their scale and diversification that result in the strongest returns on capital in the industry. More importantly, the companies are able to cover their investment and payouts with cash from operations -- something investors really want right now.
Most of them remain in excellent financial health, with ample cash on hand and investment-grade credit ratings with a manageable debt-to-capitalization ratio. On top of this, managements have established quite a track record of conservative capital management and cash returns to shareholders. They also pay a safe dividend, yielding attractive returns.
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