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Big Oil sees cash coming in, but investors won’t get it yet

(Bloomberg) – After one of the toughest years in oil industry history, crude oil prices have rebounded and big producers are finally starting to generate cash. Investors really want to get their hands on it, but most will likely be disappointed. This is because the pandemic created a debt inheritance for the world’s largest international oil companies, many of whom borrowed to fund their dividends when prices collapsed. For Exxon Mobil Corp. and Total SE, which took the financial burden of maintaining shareholder payouts last year, will use any additional money to reduce debt. Chevron Corp. and Royal Dutch Shell Plc have announced that they will resume buybacks, but not yet. Only BP Plc ignores the possibility that shareholder returns could soon improve after a year and a half flip-flop over payout policy. Next week’s first quarter results should show a significant improvement in both earnings and cash flow after an emergency in 2020, but likely nothing that would change investor disenchantment with oil companies. “They are only attractive to a limited extent as long-term investments because they cannot demonstrate that they can deliver sustainable cash flow and return it on a sustainable basis. “Said Christyan Malek, Head of EMEA Oil and Gas at JPMorgan Chase & Co ..” The key is consistency. We haven’t had any. “The first quarter will be a turning point for the industry, according to JPMorgan. Company data and estimates compiled by Bloomberg show that free cash flow – remaining after operating expenses and investments – will increase to $ 80 billion this year for the five super majors, compared to about $ 4 billion in 2020. Shell will be at the top, at around $ 22 billion, Exxon will total $ 19 billion, and even the lowest-ranking BP will be around $ 11 billion. That will be enough for each of the five majors to cover their planned dividends for 2021 and collectively have more than $ 35 billion left. It is unclear how much of this could end up in shareholders’ pockets. Strong free cash flow in the first quarter will vary, ”said Will Hares, analyst at Bloomberg Intelligence. “BP has reached its debt target and will announce the resumption of buybacks. Shell has announced a small increase in its dividend, but buybacks are unlikely to resume given its net debt target of $ 65 billion. BP’s buybacks After increasing its dividend by 2.4% in February 2020 and halving the payout just six months later, BP has come under pressure to prove it can deliver reliable returns to shareholders. The shares of the London-based company have had the worst performance of its peer group over the past 12 months. Even its chief executive officer, Bernard Looney, has acknowledged that investors are wondering if BP can push through its reinvention for the low-carbon age. Earlier this month, BP managed to positively differentiate itself from its peers and give the clearest signal of impending buybacks. The company said it achieved its goal of cutting net debt to $ 35 billion about a year earlier than expected and will release an update to its share buyback schedule on Tuesday when it opens Big Oil’s earnings season. This is a significant increase in the urgency to improve shareholder returns. Back in August, BP set a goal of returning 60% of excess cash to investors fifth on the priority list after funding the dividend, reducing net debt, shifting spending to low-carbon projects, and spending on nuclear oil and gas, their peers Stocks that have done better over the past year are not moving as fast. France’s Total, the only oil major in the region to keep its dividend last year, has stated that any extra money from higher oil prices will be used to reduce debt. The next priority will be to increase investments in renewable energy to around 25% of the total budget. Buybacks will only take place afterwards. Shell announced a 4% increase in dividend in October after cutting its payout by two-thirds earlier in the year. The aim is to reduce net debt by $ 10 billion before giving any additional money back to shareholders. Banks like Citigroup Inc. and HSBC Holdings Plc assume this won’t happen until 2022, as net debt rose to $ 75 billion in the final quarter of 2020. Unlike BP and Shell, the North American majors managed to keep their payouts intact until 2020, but at a high cost. Exxon’s mountain of debt rose 40% to $ 73 billion during the pandemic, prompting Moody’s Investors Service to downgrade the company’s bonds twice in the past 12 months. The Texas-based giant expects to return to profits after four consecutive quarters of losses in the first three months of 2021. The company has announced that it will hold on to its annual dividend of $ 15 billion while paying off the debt if oil and gas prices stay at current levels. JPMorgan sees Exxon’s free cash flow spike to $ 19.6 billion this year, which is a sizable surplus to reduce borrowing. Of the five super majors, according to HSBC analyst Gordon, Chevron has the best record and “strong prospects” for a share buyback Gray. The California-based company said in March that it should generate $ 25 billion in free cash beyond its dividend by 2025 if Brent crude oil stays at $ 60. The oil majors’ focus on investing satisfaction and healing their financial wounds comes largely at the expense of investing in their core businesses. As the pandemic spread over the past year, companies cut their spending to the lowest combined level in 15 years, according to Bloomberg Intelligence. The stranglehold continues this year, with investment likely to increase only marginally despite the recovery in oil. Chevron and Exxon both completed spending plans at radically reduced levels through 2025. Total has slightly increased its investment budget for this year. While BP and Shell have set a hard cap on spending. While the combination of higher oil prices, rock bottom spending, and asset sales cause the surge in cash flow that can help solve the super majors’ short-term problems, it can cause long-term headaches. Shell admitted earlier this month that it is not investing enough in new projects to offset the natural decline in production from its existing oil and gas fields. The majors “quench shareholders’ thirst for returns on money,” said Russ Mold, investment director at AJ Glocke. In the long run, “Investment cuts, debt, and divestments could do just as much harm, if not more, than good, and none is truly sustainable.” For more articles like this, visit bloomberg.com. 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