Big Oil Earnings Show an Industry Still Living Beyond Its Means

(Bloomberg) -- Big Oil has spent a year in survival mode -- taking an ax to spending and cutting dividends. But even after a rally in crude prices the industry is still living beyond its means.

On Thursday, Royal Dutch Shell Plc added itself to the growing list of supermajors to post a disappointing set of fourth quarter results. Like many of its peers, the Anglo-Dutch company reported weak cash flow and net income that fell short of expectations.

The earnings came as an unpleasant surprise to a market that had been expecting a tailwind after crude recovered from last year’s historic lows. But with Covid-19 lockdowns in countries around the world still depressing fuel sales and refining margins, the industry’s finances remain fragile.

Big Oil’s performance is still “reflecting the worst of Covid-19,” said JPMorgan Chase & Co. analyst Christyan Malek. “Cash flows generated in the fourth quarter are a low point,” but should improve this year, he said.

Investors got some good news. Shell reiterated its commitment to grow its dividend, with a 4% hike promised for the first quarter. Exxon Mobil Corp. pledged to maintain its payout even as debt surged and it made its first annual loss in four decades.. But neither company generated enough cash from operations to cover capital expenditures and payments to shareholders in the fourth quarter.

The industry is relying on measures such as asset sales, rising debt, and cuts to jobs and investment to keep dividends flowing. The consequence could be lower oil and gas production in the coming years.

Exxon has all but abandoned its counter-cyclical growth strategy. It’s reduced capital expenditure to a record low this year, and plans to cut some $50 billion from its planned spending over the next five years. Sounding chastened, Exxon Chief Executive Officer Darren Woods said he will “make adjustments to our capital program depending on market conditions” and prioritize debt repayment.

Chevron Corp.’s capital spending is at the lowest in at least a decade and less than half 2014 levels. The California-based company is unwilling to resume its previous spending plans in the Permian shale basin, its key growth asset, until the effects of the pandemic are behind it. BP Plc’s planned $13 billion capital expenditure for 2021 is already at the lowest end of its budgeted range.

Earnings season isn’t over. France’s Total SE and Italy’s Eni SpA will publish their results in the coming two weeks.

The French energy giant in particular has so far weathered the crisis so far better than its peers, having managed to preserve its dividend, expand oil and gas output and make the greatest inroads into clean energy, an area all the European majors have committed to growing.

And with crude prices rising to a one-year high in New York this week, and nearing $60 a barrel in London, the outlook is more positive.

“The only thing in their favor this quarter are oil and gas prices,” said JPMorgan’s Malek. The industry still has problems to overcome in refining and fuel marketing, but the “positive tailwinds” from prices should help improve cash flow, he said.

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