Can European Supermajors Keep Cash Coming At $60 Oil?

Can European Supermajors Keep Cash Coming At $60 Oil?

Moneycube  | Feb 11, 2019 12:46

The supermajors have reported stellar 2018 results over the last couple of weeks.

Total (PA:TOTF) was the last of the big five to report, last Thursday. Like the other European supermajors, BP (LON:BP) and Royal Dutch Shell (LON:RDSa), Total’s results showed their best year in nearly half a decade.

Combined, cash flow from operations from the three during 2018 was over $103 billion.

It’s the barrel price, stupid!

The reason is pretty simple: the average barrel price for 2018 was the best since the days of $100 oil back in 2014.

Brent crude averaged at $71.06 in 2018, compared to $54.25 in 2017.

2019 looks more fragile

But 1Q 2019 has not been so rosy, with Brent trading mostly in the upper fifties. That will hit cash flows in next quarter’s announcements, and it’s one reason Total shares ended down on the day in spite of its results.

Total SA to 190208

At the same time, there are many demands on oil companies’ cash. Above all, the dividend.

The big oil companies are stalwart dividend payers, supporting the pensions of millions through their regular payouts. Shell declared 2018 dividends worth $15.7 billion, for example. Keeping a strong dividend is vital for continued investor support.

Capital commitments

But there’s also a business to run - Shell is guiding annual capital expenditure costs of $25-30 billion over the next few years.

And developing new discoveries is getting more expensive. On Thursday, Total announced the discovery of a potential 1-billion-barrel oilfield offshore South Africa. Great news, but it is 175 km offshore in deep water, making it relatively expensive to produce.

Debt demands

Then there’s the cost of repairing the balance sheet after the lean oil price years of 2015-17, and the cost to BP's Gulf of Mexico oil spill payments. Recent acquisitions by BP and Shell have also driven up debt.

BP’s gearing (net debt as a percentage of total capital), at just over 30%, is at the upper end of its target range, and last week they pushed out their target date to reduce it to the mid-twenties from 2019 to 2020.

Shell’s gearing is in the middle at 20.3%, but the business has committed to a share buyback programme costing $25 billion over the next two years.

Total’s gearing was 15.5%, giving more scope to withstand dips in cash receipts.

Management seem confident

Set against capex requirements, debt reduction targets, share buybacks, and dividend expectations, it’s easy to see how $100 billion of operating cash flow can get eaten up.

But the European supermajors’ management teams sounded confident during results briefings.

BP’s CFO indicated they can fund capex, share buybacks and drive down debt even at $50 a barrel. Shell have suggested there is something in the region of $15 billion available for buybacks and debt reduction at $60 oil. And Total announced that the next dividend will be paid entirely in cash, and that it would continue its share buyback programme up to $1.5 billion even in a $60 oil environment.

That environment is now upon us – let’s see how management predictions stand up in the real world.


Related Articles

Latest comments

Add a Comment
Please wait a minute before you try to comment again.
Adrian Watt
Adrian Watt

UKOG onshore assets must me a target soon or later. inexpensive extraction costs. Huge potential reserves in the UK Weald Basin which UK Oil and Gas plc have tapped in to and now flowing from the Kimmeridge and Portland horizons.  ... (Read More)

Feb 11, 2019 21:02 GMT· 1 · Reply
Write a reply...
Please wait a minute before you try to comment again.

Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.

English (USA) English (India) English (Canada) English (Australia) English (South Africa) English (Philippines) English (Nigeria) Deutsch Español (España) Español (México) Français Italiano Nederlands Português (Portugal) Polski Português (Brasil) Русский Türkçe ‏العربية‏ Ελληνικά Svenska Suomi עברית 日本語 한국어 中文 香港 Bahasa Indonesia Bahasa Melayu ไทย Tiếng Việt हिंदी
Sign out
Are you sure you want to sign out?
Saving Changes