Analysis - Majors outspend their cash flow
London, 7 September (Argus) — Most of the majors are outspending their cash flow, in some cases laying out far more money than they are bringing in from operations and asset sales. This comes as capital budgets expand and pressure to reward shareholders with growing dividends and stock buybacks persists.
Among the five majors, only Shell generated more cash flow from operations in this year's first half than it spent on capital projects, dividends and share repurchases. Cash flow at ExxonMobil, Chevron and Total exceeded capital expenditure (capex), but the two US firms paid out more cash than they brought in when including shareholder distributions. Total exceeded cash flow when including acquisition costs. It took expanding divestment programmes to close the gap between cash inflows and outflows.
BP, and former major ConocoPhillips — now the world's biggest upstream independent — had the largest cash deficits. BP and ConocoPhillips outspent their proceeds from operations and divestments by $2.3bn and $6.2bn, respectively, even after big disposals. With new sources of production becoming more complex and costly to tap, the majors and ConocoPhillips plan $160bn total capex this year. Shell plans a 23pc spending rise from 2011 levels.
But companies are not backing off on shareholder distributions. Institutional investors have come to expect a steady stream of dividend increases, and anything less is cause to jump from one energy stock to another. ExxonMobil and Chevron have increased stockholder payouts each year since 1983 and 1988, respectively. ConocoPhillips has a 12-year run of increases. BP had one of the industry's highest dividend yields — annual dividends as a percentage of stock price — before temporarily suspending its payouts in 2010 because of costs from the Macondo oil spill.
Stock buybacks are another popular way of returning cash to investors, increasing their stake in the company by reducing the number of shares outstanding. ExxonMobil is buying back about $20bn/yr of its shares. ConocoPhillips has repurchased $16bn of stock since the start of last year, using proceeds from asset sales.
ConocoPhillips has stopped buybacks for now, but cash deficits call into question the ability of the company and other large oil producers to support their capex plans and shareholder distributions without taking on more debt. US energy bank Tudor Pickering Holt says more asset sales are needed to sustain ExxonMobil's distributions, and Total's payouts will only be viable if the firm achieves its growth projections.
ConocoPhillips faces a bigger struggle to match cash flow with dividends and capex, especially if oil prices fall. “There is no realistic way for Conoco to internally generate enough operating cash flow to fully fund a $15bn capex budget as well as the dividend payout,” US bank Raymond James says. The bank expects ConocoPhillips will have a $7.2bn deficit between its cash flow and its capex and dividends in 2013. Brent crude prices would need to average $125/bl for the company to break even on cash inflows and outflows.
ConocoPhillips says dividends are its top priority for cash use. If commodity prices were to slump for an extended period, its first response would be to cut capex and raise debt, chief executive Ryan Lance says. The firm aims to end its cash shortfalls by growing production and focusing on projects with higher profit margins.
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