(OET) While looking into the conundrum concerning the cashflow and capex of five supermajor oil companies – BP, Shell, Chevron, ExxonMobil and TotalEnergies – Westwood Global Energy, an energy market research and consultancy firm, has outlined that capital investment is lagging, even though the energy giants became efficient in generating cash from oil and gas production, enabling record payouts to shareholders.
According to Westwood, production fell by around 900 mboe/d between 2013 and 2022, mainly due to a combination of the forced exit from Russia and divestments of higher cost production, yet operating cashflow increased from $171 billion in 2013 to $283 billion in 2022, which is an increase from $30 to $53 for every barrel produced, on an oil price 7 per cent lower.
The company explains that this transformation in cash generation capability is a combination of factors – lower operating costs through divestment of higher cost assets, increased operational uptime and efficiency, relatively higher natural gas prices, bigger oil and gas trading operations, lower supply chain costs, and slimmed down organisations.
Back in 2013, the energy companies were all about growth, with $1.1 invested for every $1.0 generated from operations while $40 billion in cash dividends and $15 billion of share buybacks had to be covered by $26 billion of new borrowing.
While oil companies were “fat and happy,” it could not last, pointed out Westwood, adding elaborating that the oil price crashed in late 2014, exposing the overspending in the dash for growth in the 2010-14 period and massive capital impairments and headline losses followed. As a result, boards shied away from growth to focus on returns.
When it comes to 2022, the war in Ukraine combined with a rebound in oil and gas demand, following the covid pandemic, set the scene for a boom in oil and gas prices and cash generation by the now leaner and more efficient oil companies. Westwood claims that all well and good, but puts the emphasis on what the supermajors did with the $283 billion in cash they generated in 2022.
While total organic capital investment was $83 billion in 2022, $18 billion or 27 per cent higher than in 2021, it was still below pre-covid pandemic levels and over $100 billion less than the $188 billion invested in 2013.
Based on Westwood’s statement, only 29 cents in every dollar of operating cash inflow was reinvested and only 19 cents of this was in the upstream. Although lower supply chain costs mean less capital is needed to sustain production than in 2013, there is clearly the financial capacity to spend more if companies choose to do so.
On the other hand, $111 billion was spent on shareholder payouts with $49 billion going on dividends and $62 billion on share buybacks. While cash dividends were only $9 billion more than in 2013, share buybacks increased by $47 billion. In addition, $40 billion in debt was repaid and total shareholder returns for the supermajors in 2022 averaged 48 per cent, 5 per cent from cash dividends and 43 per cent from increased share prices.
Furthermore, Westwood says that the modest capital investment levels compared to shareholder distributions have attracted political attention at a time of high inflation when governments in Europe have to subsidise energy bills, thus, the clamour for windfall taxes to capture the exceptional profits has proved hard to resist.
In its latest analysis, Westwood believes that capital investment is lagging, because companies are promising to focus on value over volume through 2030, with an emphasis on low cost, lower emissions production with strong cash generation and generous shareholder distributions while capital discipline is promised with upstream projects to downside price scenarios.
The firm illustrates this by pointing out that Exxon says 90 per cent of its capex will be in projects that deliver >10 per cent returns at less than or equal to $35/bbl while for LNG it is >10 per cent returns at $6/mmbtu. Meanwhile, TotalEnergies is targeting projects with <$30/bbl after tax breakeven, or <$20/boe combined capex and opex while only BP is committed to cutting oil and gas production by 2030, though it has recently raised its production target to 2 million boepd in 2030 from 1.5 million boepd previously.
Moreover, Westwood underlines that there are opportunity constraints with asset portfolios having shrunk and only modest exploration success in the last few years, meaning a limit to the upstream development options that meet these strict criteria. Additionally, new oil and gas project sanctions have been met with vocal no new oil and gas is needed protests and legal challenges designed to discourage investment.
In line with this, spending on energy transition related projects is ramping up, but it is still relatively modest compared to conventional hydrocarbons. BP reported the rates of return expected from their renewables power portfolio to be typically 6-8 per cent, hardly attractive when returns on capital employed for the majors are now over 20 per cent, with upstream doing even better than that, underscores Westwood.
According to the five oil majors, capital investment levels are going to hold roughly at current levels through 2030, arguing that continued capital discipline is what is going to drive exceptional cash generation and shareholder returns.
In the meantime, the public discourse includes calls for both higher short-term oil and gas production and more aggressive investments in renewables to calm prices, as a combination of continued demand growth for oil and gas and lower investment has driven prices higher.
Westwood claims that oil companies can say “very reasonably” that they do not set oil and gas prices, as the supermajors together account for only 8 per cent of global oil and 10 per cent of global gas production.
Westwood concludes that big oil is not going to open the capital investment taps, since it is not in their interests to do so. Therefore, society will need to decide what to do about the excess upstream cash generation unless it can tame demand to bring prices down. As a result, the firm says that the debate about windfall taxes will no doubt continue.
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