Big Oil to confront tough choices as mega profits fade into memory

Energy supermajors are being forced to confront some tough choices in a weaker crude price environment, with generous shareholder payouts expected to come under serious pressure over the coming months.

U.S. and European oil majors, including Exxon Mobil, Chevron, Shell and BP, have moved to cut jobs and reduce costs of late, as they look to tighten their belts amid an industry downturn.

It reflects a stark change in mood from just a few years ago.

In 2022, the West’s five biggest oil companies raked in combined profits of nearly $200 billion when fossil fuel prices soared following Russia’s full-scale invasion of Ukraine.

Flush with cash, the likes of Exxon Mobil, Chevron, Shell, BP and TotalEnergies sought to use what U.N. Secretary-General António Guterres described as their “monster profits” to reward shareholders with higher dividends and share buybacks.

Indeed, the amount of cash returns as a percentage of cash flow from operations (CFFO) has climbed to as much as 50% for several energy companies in recent quarters, according to Maurizio Carulli, global energy analyst at Quilter Cheviot.

In today’s environment of weaker crude prices, however, Carulli said this policy risks taking on new levels of debt beyond what could be considered a “healthy” balance sheet.

BP and, more recently, TotalEnergies have announced plans to take steps to reduce shareholder returns.

BP in April lowered its share buyback to $750 million, down from $1.75 billion in the prior quarter, after reporting first-quarter profit which fell short of market expectations. TotalEnergies, for its part, said late last month that it had decided to adjust the pace of its share buybacks “in order to face economic and geopolitical uncertainties and to retain room to maneuver.”

Quilter Cheviot’s Carulli described these moves as a “sensible change in direction,” noting that other oil majors will likely follow suit.

Thomas Watters, managing director and sector lead for oil and gas at S&P Global Ratings, echoed this sentiment.

“Oil companies are under pressure as crude prices soften, with the potential for prices to fall into the $50 range next year as OPEC continues to release surplus capacity and global inventories build,” Watters told CNBC by email.

“Faced with the challenge of sustaining these returns in a lower-price environment, many will look to reduce costs and capital spending where they can,” he added.

Clark Williams-Derry, energy finance analyst at the Institute for Energy Economics and Financial Analysis (IEEFA), a…