Calls grow to pay out oil profits

Fading industry faces reality that alternative energies will replace oil in 30 years

CALGARY— A rising chorus of voices is calling for the oil industry to reduce spending on growth and begin rewarding shareholders through things such as higher dividends and share buybacks.

Investment researchers, thinktanks and newspaper editorials have recently begun advocating that big petroleum companies return as much capital to shareholders as possible as the transition away from fossil fuels gathers momentum and profits fade.

“Demand forecasts are way too positive,” says Paul Sankey, managing director of New York-based Wolfe Research. “Really the essence of the opportunity for oil is to be dividend stocks to pay out. Not to attempt to grow, but actually to orderly liquidate.”

Speaking at a PwC energy forum in Calgary last week, Sankey said lower than expected oil-demand growth and increasing action on climate change will mean alternative energy sources will displace oil in the next 30 years.

His comments echo a recent Financial Times editorial that oil companies are entering their twilight years and should focus on dividends and share buybacks. The newspaper specifically singled out the high-cost, high-carbon Canadian oilsands as having some of the lowest justification for growth.

At this year’s ExxonMobil annual general meeting, a shareholder resolution called on the company to increase dividend payouts and share buybacks in light of the risks of climate change policy and stranded assets.

The resolution only garnered 4.1 per cent of shareholder support, with Exxon recommending shareholders vote against it because it is already factoring in carbon policies in growth decisions and has steadily increased its dividend.

Sankey said it’s hard for companies to accept that they face decline.

“It’s very tough for companies such as an Exxon, with a big corporate ego, to really reflect that it’s the end of the oil age and they should shrink.”

Paul Stevens at the London-based Chatham House think-tank published a report earlier in May that also argued that the business model of major oil companies is broken.

Stevens said there is “growing disillusion on the part of their shareholders with a business model rooted in assumptions of ever-growing oil demand, oil scarcity and the need to increase bookable reserves.

These assumptions increasingly lack validity, he said.

However, if the major oil companies can shift their business models they will be able to “slip into a gentle decline but ultimately survive, albeit on a much smaller scale,” he said.