Archives

Home   >   Archives   

WSJ: Big Oil’s Flood of Cash Underwhelms Investors

Rig Lynx
  • By Rig Lynx
  • Oct 24, 2018
  • Category : Archives
  • Views : 701

Soaring crude prices have put the oil industry on track to churn out huge cash piles this year. Even so, investors aren’t buying it. Literally.

The world’s six largest Western energy companies— Exxon Mobil Corp. , Chevron Corp.Royal Dutch Shell PLC, BP PLC, Total SA and Equinor AS A—are set to generate their biggest profits since 2013. At the same time, they are projected to produce $90 billion in excess cash, the most in a decade, according to S&P Global Market Intelligence.

Yet while the price of the global oil benchmark has surged around 20% so far this year, those six companies have seen their shares rise by an average of roughly just 4%, according to FactSet. In the past, energy stocks have moved more in line with the price of crude. While the European companies have seen their share prices rise this year, both Exxon’s and Chevron’s stock has fallen.

The broader sector has fared even worse. Since the start of the year, the MSCI World Energy Index has climbed around 0.4%, lagging behind the S&P 500, which is up a little over 3%.

“These companies struggle to please,” said Rohan Murphy, an energy analyst at Allianz Global Investors, which has over €520 billion ($596 billion) in assets under management.

Many fund managers say they remain wary of the sector and the oil rally. They’re skeptical that prices will remain at their current levels and aren’t convinced the oil companies will refrain from mistakes of previous cycles, spending lavishly when prices are high and setting the stage for investor pain when they fall.

“As long as companies continue to spend all the cash flow they have without regard to returns, this industry will continue to be unappealing for generalist investors,” said Chris Duncan, an energy analyst at Brandes Investment Partners who helps manage $28 billion in diversified assets.

The industry’s latest test comes later this week with the start of the third quarter earnings season. Equinor is first to report on Thursday. BP, Shell, Chevron and Exxon all report next week. The price of oil averaged around $75 a barrel between July and September and expectations have risen along with prices.

The companies are facing pressure to deliver on optimistic forecasts. So far, their performance has been inconsistent. Even as oil prices have climbed, reaching above $80 a barrel last month, oil giants such as Exxon have fallen short of profit expectations. The biggest six missed analyst expectations by an average of 14% in the second quarter, according to S&P Global Market Intelligence.

Those results were underwhelming, said Tom Ellacott, senior vice president for corporate research at Edinburgh-based consultancy Wood Mackenzie. “Investors are looking for evidence that it’s different this time.”

To entice investors back to the sector, executives have put their companies on a strict capital diet. Instead of raising spending with higher prices, they’ve increased shareholder payouts, paid down debt and launched share buybacks. Rather than pouring money into massive new developments and high-cost exploration, they now say they’re prioritizing projects with high profits, rather than high volumes.

“Our valuation as an industry is still low because people worry we’re off to the races and we’re going to be spending too much money,” BP CEO Bob Dudley said in a London speech earlier this month. “The industry has learned such a painful lesson; capital discipline is really important.”

Even among smaller U.S. shale producers, investors remain skeptical that the companies have found religion on spending. Many continue to push producers to plan for a future where crude sells for $50 a barrel and return any upside to shareholders.

“The issue we’ve had with investors is that there’s been so many ups and downs,” said Brian Youngberg, an analyst at Edward Jones. “The overall strategy now is to manage for the downtime, and when you have prices up like they are right now, maintain your discipline, reduce debt, and return cash to shareholders.”

Write to Sarah Kent at sarah.kent@wsj.com and Bradley Olson at Bradley.Olson@wsj.com

Photo used under  Creative Commons Attribution 3.0 Brazil License. Author: ArionEstar

Comments (0)

Leave Comment


Check out our other stories

Rig Lynx
Mar 09, 2023

  Valaris Limited announced new contracts awarded subsequent to issuing the Company’s most recent fleet status report on February 21, 2023.   Three-year contract with Petrobras for drillship VALARIS DS-8. The rig will be reactivated for this contract. The total contract value is approximately $500 million, including a $30 million mobilization fee. 100-day contract with a TotalEnergies affiliate for drillship VALARIS DS-12. The contract is expected to commence in second quarter 2023. 70-day contract with Beach Energy offshore New Zealand for heavy duty modern jackup VALARIS 107. The contract is expected to commence in third quarter 2023. The total contract value is approximately $26 million. President and Chief Executive Officer Anton Dibowitz said, “We are particularly pleased to have secured the award for preservation stacked drillship VALARIS DS-8, for a contract that is expected to generate a meaningful return over the firm contract term, and we remain focused on exercising our operational leverage in a disciplined manner. This most recent award represents the sixth contract awarded to one of our high-quality stacked floaters since mid-2021, and speaks volumes about our demonstrated track record of project execution when reactivating rigs.”   Dibowitz added, “Following the reactivation of VALARIS DS-17 and DS-8, we will have ten floaters working across the golden triangle, including four drillships in Brazil, a market where we expect to see continued growth over the next several years.”   Updated Guidance   As a result of the contract awarded to VALARIS DS-8, which will require the rig to be reactivated from preservation stack, we are updating our first quarter 2023 and full-year 2023 guidance provided on our fourth quarter 2022 conference call on February 21, 2023.   First Quarter 2023   Contract drilling expense is expected to increase by approximately $5 million to $385 million to $395 million. Adjusted EBITDA is expected to decrease by approximately $5 million to negative $5 million to breakeven. Adjusted EBITDAR, which adds back one-time reactivation expense, is expected to be $25 million to $30 million, unchanged from the guidance provided on our fourth quarter 2022 conference call. Full-Year 2023   Revenues are anticipated to be $1.8 billion to $1.9 billion, unchanged from the guidance provided on our fourth quarter 2022 conference call. Contract drilling expense is expected to increase by approximately $60 million to $1.49 billion to $1.59 billion. Adjusted EBITDA is expected to decrease by approximately $60 million to $180 million to $220 million. Adjusted EBITDAR, which adds back one-time reactivation expense, is expected to be $280 million to $320 million, unchanged from the guidance provided on our fourth quarter 2022 conference call. Capital expenditures are expected to increase by $60 million to $320 million to $360 million. Source: Valaris Join our mailing list here We are #1 on Google and Bing for the "Largest Mobile Energy Network" Come join our community! Download the Rig Lynx app here  

Rig Lynx
Mar 09, 2023

  Seadrill Limited announced that the West Neptune has executed approximately six months of term extensions with LLOG Exploration Offshore, L.L.C in the US Gulf of Mexico.   The extensions will commence in direct continuation of the existing term, and will keep the rig busy until Q3 2024, furthering Seadrill and LLOG’s long-term association. Total contract value for the extension is approximately $79 million. Source: Seadrill   Join our mailing list here We are #1 on Google and Bing for the "Largest Mobile Energy Network" Come join our community! Download the Rig Lynx app here  

Rig Lynx
Mar 09, 2023

  Semisub rig owner Dolphin Drilling has inked a new contract with Peak Petroleum in Nigeria for its 1974-built Blackford Dolphin.   The firm contract, which follows the letter of award in January, gives the Euronext Growth-listed owner of three rigs the potential to extend the unit’s backlog by a minimum of 120 days and up to 485 days. The deal adds to and will be a direct continuation of the previously announced 12-month contract with General Hydrocarbon Limited (GHL).   Øystein Stray Spetalen-backed company said the effective dayrate associated with the minimum firm period of the contract is $325,000, including the mobilisation fee.   “The final award of the contract for Blackford Dolphin shows the opportunities in Nigeria at a strong dayrate, in addition to building on the backlog for the rig. It also underlines the attractiveness of our assets, and we look forward to returning to revenue-generating operations in 2023,” noted Bjørnar Iversen, CEO of Dolphin Drilling.   Source: Dolphin   Join our mailing list here We are #1 on Google and Bing for the "Largest Mobile Energy Network" Come join our community! Download the Rig Lynx app here