"Energy Giants Brace for Financial Turbulence: Billions in Borrowing Looms as Oil Prices Drop"
By Ron Bousso
LONDON (Multibagger) – The world's leading energy companies are gearing up to borrow billions to sustain shareholder payouts amidst plummeting oil prices, according to analysts. This strategic move comes after more than two years of record profits, but now, the landscape is changing.
The Shift in Energy Sector Dynamics
Historically, energy giants such as BP (NYSE:), Chevron (NYSE:), Exxon Mobil (NYSE:), Shell (LON:), and France’s TotalEnergies (EPA:) have attracted investors through consistent payouts. However, the transition towards lower-carbon energy solutions has cast a shadow on the long-term prospects of the industry.
Since the onset of 2022, these titans have collectively rewarded investors with over $272 billion in dividends and share repurchases. The surge in energy prices post-Russia's invasion of Ukraine in February 2022, coupled with the global economic recovery from the pandemic, fueled unprecedented profits for the industry.
The Downward Spiral
Despite the initial financial windfall, a recent drop in benchmark prices to below $70 a barrel—the lowest since late 2021—alongside declining profits from refining oil into fuels, signals a downturn in earnings for the coming quarters.
A "Lost Year" on the Horizon?
In recent weeks, several banks have revised their oil price forecasts downward, reflecting a weak demand outlook and slashing profit predictions for the sector. RBC Capital Markets analyst Biraj Borkhataria noted, “With moderating oil prices and weak refining margins, 2025 could be seen as a lost year for the sector.”
Exxon, Chevron, Shell, and TotalEnergies are expected to maintain their share repurchases at current levels through next year. However, they may resort to borrowing money to bridge financial gaps, even as interest rates remain high. According to RBC’s forecasts, maintaining 2024 levels of buybacks might require Chevron to borrow $8.6 billion, Exxon $5.1 billion, TotalEnergies $5.6 billion, Shell $3.8 billion, and BP $3.1 billion.
Financial Strategy and Debt Management
BP, burdened with higher debt than its peers, is likely to slow down its buyback pace. The returns from Italy's Eni will hinge on the scale of its asset sales, Borkhataria added. “The difference in your ability to maintain the distributions is how strong your balance sheet is today, and how willing are you to re-lever in order to maintain distributions,” he said.
UBS analyst Joshua Stone predicts BP will cut its buybacks to $4 billion in 2025 from $7 billion this year, assuming an average crude price of $75 a barrel. Shell might reduce its buybacks by $1.5 billion to $12.5 billion, while TotalEnergies could maintain its rate of $8 billion.
Tough Decisions Ahead
BP’s second-quarter results in August highlighted its plan to buy back at least $14 billion through 2025, reaffirming its commitment to return 80% of surplus cash to shareholders. Despite a net debt of $22.6 billion at the end of June and a market capitalization of $85 billion, BP maintains a disciplined financial approach.
Other major players like Chevron, Exxon, Shell, and TotalEnergies have yet to comment on their shareholder return plans. Some, like Chevron, have already dipped into cash reserves to fulfill their return promises. For instance, Chevron paid $6 billion to investors in the second quarter while net earnings stood at $4.4 billion, and debt increased by about $2.5 billion from the previous quarter.
Late August saw Morgan Stanley analysts lowering their earnings forecast for the sector, stating that “share buybacks are maxed out for now.” Investment bank Jefferies also reduced its oil price assumptions for the remainder of 2024 and 2025, predicting a 22% decrease in sector earnings for the third quarter compared to the previous three months.
The Bottom Line
Analyst Giacomo Romeo from Jefferies pointed out that companies would likely maintain returns by cutting spending, particularly on low-carbon energy investments, and by borrowing. “Companies will have to face some tough choices in the coming months if macro prices don’t recover,” he concluded.
Summary for the Layman
What’s Happening?
- Major energy companies are planning to borrow billions to maintain shareholder payouts due to falling oil prices.
- Companies like BP, Chevron, Exxon Mobil, Shell, and TotalEnergies have paid out over $272 billion in dividends and share repurchases since 2022.
Why Should You Care?
- If oil prices stay low, these companies might reduce their buybacks or dividends, which could impact investors’ returns.
- Companies may cut spending on low-carbon energy projects to maintain financial stability, potentially slowing down the transition to cleaner energy.
How Could This Affect Your Finances?
- If you are invested in these energy companies, be prepared for potential changes in dividend payouts or share repurchase programs.
- The broader economic implications could affect fuel prices and the pace of energy transition, influencing everything from your energy bills to the stock market performance.
Understanding these dynamics can help you make more informed decisions about your investments and financial planning.