Major oil companies atop a cash-flow wave reduce debt, increase shareholder payouts
Energize Weekly, December 20, 2023
The world’s five largest oil companies, riding a wave of high energy prices, pulled in $613 billion in cash flow between January 2021 and September 2023, which they used to reduce debt and send to shareholders, according to Moody’s Investors Services.
A Moody’s analysis traced how the five – BP, Chevron, ExxonMobil, Shell, and TotalEnergies – used that swell in cash.
“Oil and gas companies’ financial strength took a hit during the early stages of the pandemic when oil prices collapsed as demand dried up,” the analysis said. “Credit ratings downgrades outpaced upgrades 13 to 1 for the global oil & gas sector in 2020.”
Since 2021, however, positive rating actions have exceeded negative actions for the sector 3 to 1 and with billions of dollars in reserve, the sector’s credit quality has recovered.
“The Big Fives profits and cash flow have enabled significant returns to shareholders, bolstered their balance sheets and put them in a stronger position to respond to the future erosion in demand for fossil fuels,” the credit rating agency said.
The companies “have increasingly opted to return surplus cash to shareholders,” the report said, with $235 billion sent to shareholders in dividends and stock buybacks.
In 2022, share buybacks hit a record $57 billion, more than the total combined amount from 2015 to 2021, while dividends have been largely stable since 2013.
The buybacks accounted for more than half of the 2022 distributions to shareholders. In 2023, by September, there had already been $48 billion in buybacks.
“While the companies may make some gradual improvements to their balance sheets, their recent sharpened focus on shareholders is likely to persist – a credit negative from Moody’s perspective because the cash flow is directed away from their balance sheets and investments,” the rating agency said.
The five majors spent $237 billion to build, maintain and upgrade infrastructure and physical assets, with capital expenditures increasing 19 percent between 2020 and 2021. Still, this is less than half of what they invested in the last peak cycle a decade ago.
“Total investment may grow in the coming years but remain well below historical peak,” Moody’s said, in part because of desire for quicker returns on assets.
Another $134 billion was used to pay down debt, which fell 28 percent to the lowest level since 2014.
“This credit positive action has given them the ability to maintain strong credit metrics even if oil and gas prices fall, while navigating geopolitical developments and energy transition pressures,” Moody’s said.
Cash reserves also increased by $32 billion, with total reserves now at $136 billion, 43 percent more than the average over the last 10 years. Moody’s also sees this as credit positive as increased cash balances can cushion market shocks.
The five spent $27 billion on acquisitions, having stepped up activity in 2022 and 2023, although large deals, such as ExxonMobil’s $60 billion purchase of Pioneer Natural Resources, were financed with stock not cash.
The majors, however, tend to sell more assets than they acquire, Moody’s said, noting that while they spent $27 billion, the companies collected $52 billion in asset sales.
“Acquisitions made since 2022 have often been to support low-carbon and growth businesses in areas such as renewable energy, bioenergy (biofuels and biogas), distribution networks or carbon capture,” Moody’s said. “These investments, if successful, can help adapt to a decarbonizing world.”
Despite the companies’ robust financial positions, the sector faces long-term uncertainties about the future of demand and regulation.
Companies cash flow could be squeezed by a combination of tightened regulation and taxes, such as the pandemic windfall taxes on significant profits levied by the European Union and the United Kingdom.
The windfall taxes bit into 2022 cash flow, but shouldn’t have as much impact in 2023, Moody’s said.
Policies, such as the United States’ Inflation Reduction Act, which is promoting the transition to a low-carbon economy, may also impact the industry.
“As the Big Five respond, each has different starting points and strengths,” Moody’s said. “One advantage is that they retain some of the largest corporate balance sheets with hundreds of billions of assets — not all of which are at risk from the energy transition.”
Nevertheless, the planned investments for all five companies still lean heavily into oil and gas, ranging from 56 percent of total investment for BP to 86 percent for Chevron and 93 percent for ExxonMobil.
“Uncertainty about the global economy’s future energy mix and the pace of change poses major business risks for BP, Chevron, ExxonMobil, Shell, and TotalEnergies,” Moody’s said. “How these companies allocate capital and manage debt levels as the situation evolves will have a major influence on their future creditworthiness. The formidable cash flow they continue to generate enables them to respond.”
