The global oil supermajors are pumping in money as if crude is already trading at $100 a barrel.
BP Plc, Shell Plc, TotalEnergies SE, Exxon Mobil Corp. and Chevron Corp. just generated the highest free cash flow since the start of 2008 – when oil first climbed above $100 a barrel. Gross isn’t that high yet, but expenses are much lower, meaning there’s more money to return to investors.
“Over the past decade, oil and gas companies have had to cut weight,” said Laura Hoy, equity analyst at Hargreaves Lansdown. These leaner companies are benefiting the most from the current recovery, especially since “high oil prices appear to be here to stay.”
The five supermajors comfortably beat analysts’ expectations for fourth-quarter earnings, posting a combined free cash flow of $37 billion, as Brent crude averaged nearly $80 a barrel. That compares to $40 billion in the first quarter of 2008, when the average was $96.
Their adjusted net income also climbed to $31 billion, the highest quarter in more than nine years.
It’s quite a turnaround for an industry that endured ballooning debt and plummeting commodity prices as the coronavirus pandemic unfolded in 2020. By the end of that year, the five majors together lost nearly $19 billion.
Yet companies have spent much of 2020 aggressively cutting costs, announcing tens of thousands of layoffs and, in some cases, dramatically cutting dividends. This has positioned them well for 2021, when the crisis has turned into a remarkable rally.
The outlook for this year also looks optimistic. Demand is increasing but supply remains “rather constrained” after years of underinvestment, according to Patrick Pouyanne, managing director of TotalEnergies.
“You could see a world where, because of a lack of investment, even though the energy transition is accelerating, oil prices are much, much higher,” said BP CEO Bernard Looney.
While earnings could be sustained or even topped this year if prices hold, oil and gas markets could ease as winter ends and tensions between Russia and Ukraine ease. , according to Bernstein analyst Oswald Clint.
All five companies are holding their own on spending, with only relatively small budget increases for the year. Exxon and Chevron will increase investment in shale production in the Permian Basin, but that will more than offset production declines elsewhere in their portfolios. For BP, the extra spending will mainly go to low-carbon businesses.
This means more excess cash for investors.
“We see plenty of room to increase distributions to shareholders from current levels if commodity strength persists,” said Biraj Borkhataria, co-head of RBC European energy research.