By Ron Bousso
LONDON (Reuters) – Major energy companies are poised to borrow billions to maintain shareholder payouts or slow the pace of share buybacks in the face of a slump in oil prices after more than two year of huge profits, analysts said.
The majors have been attracting investors for decades by promising stable payouts, even as the transition to lower-carbon energy has cast doubt on the sector’s long-term prospects.
BP (NYSE:), Chevron (NYSE:), ExxonMobil (NYSE:), Shell (LON:) and France’s TotalEnergies (EPA:) have paid investors more than $272 billion in dividends and share buybacks since the start of 2022.
Energy prices soared after Russia invaded Ukraine in February 2022 and as the global economy emerged from the pandemic, delivering record profits for the energy sector.
The payout has since been almost double what it had been in the past ten quarters, Reuters calculations show.
But a drop in benchmark prices to below $70 a barrel last month, the lowest level since late 2021, coupled with a sharp drop in profits for refining oil into fuels, is expected to dent profits in coming quarters .
LOST YEAR?
Several banks have cut oil price forecasts in recent weeks in response to weak demand prospects and cut earnings expectations for the sector.
“With moderating oil prices and weak refining margins, 2025 could be seen as a lost year for the sector,” said RBC Capital Markets analyst Biraj Borkhataria.
Exxon, Chevron, Shell and TotalEnergies are expected to keep their share buybacks unchanged in the coming year, and Borkhataria said they may resort to borrowing money to cover shortfalls if interest rates are still high.
He said that to keep buybacks at 2024 levels next year, based on RBC’s oil price forecast, Chevron would be $8.6 billion next year, Exxon $5.1 billion, TotalEnergies $5.6 billion, Shell $3.8 billion and BP would have to borrow $3.1 billion.
However, BP, which has higher debt than its rivals, is likely to slow the pace of buybacks, while Italian energy company Eni’s returns will depend on the size of its asset sales, Borkhataria added.
“The difference in your ability to maintain benefits is how strong your balance sheet is today, and how willing you are to redeploy funds to maintain benefits,” Borkhataria said.
UBS analyst Joshua Stone expects BP to reduce its buyback pace from $7 billion this year to $4 billion in 2025, based on an average crude price of $75 a barrel. Shell would reduce its buyback pace by $1.5 billion to $12.5 billion, while TotalEnergies should be able to maintain the pace of $8 billion, Stone added.
“The reality is that buybacks will slow significantly if prices fall below $70 a barrel,” Stone said.
DIFFICULT CHOICES
In its August second-quarter results, BP said that under current market conditions it plans to repurchase at least $14 billion through 2025 as part of its pledge to return 80% of excess cash to shareholders.
With net debt of $22.6 billion at the end of June and a market capitalization of $85 billion, BP has the highest debt-to-GDP ratio of any oil giant, according to LSEG data.
A BP spokesperson said return guidance remains unchanged and the company maintains a disciplined financial framework.
Chevron said its low debt levels, strong creditworthiness and significant cash flow growth in the coming years are “all assets that enable us to deliver differentiated shareholder returns through volatile commodity cycles.”
Shell declined to comment. Exxon and TotalEnergies had no immediate comment when asked about their planned shareholder returns.
Some have already drawn on cash reserves to keep their return promises. For example, Chevron paid $6 billion to investors in the second quarter of the year, when net income was $4.4 billion, while debt rose by about $2.5 billion from the previous quarter.
Morgan Stanley analysts lowered their earnings forecasts for the sector in late August, saying that “share buybacks have maxed out for now.”
Investment bank Jefferies has lowered its oil price assumptions for the remainder of 2024 and 2025, expecting the sector’s profits to fall by around 22% in the third quarter compared to the previous three months.
Companies will try to maintain returns by cutting back, especially on low-carbon energy investments, and by borrowing, said Jefferies analyst Giacomo Romeo.
“Businesses will face some tough choices in the coming months if macro prices do not recover,” he added.
