Oil ma­jors churn out cash and (mostly) hand it back to in­vestors

Tehran Times - - ENERGY -

Oil com­pa­nies saw soar­ing prof­its dur­ing the third quar­ter as they emerge worst-in-a-gen­er­a­tion crude slump. The main take­away is that while re­sults are mostly above or in line with ex­pec­ta­tions, it’s get­ting harder to im­press in­vestors, even with large buy­backs.

Here are five key themes from third quar­ter earn­ings sea­son:

1. it’s all about the cash

There may be no num­ber more im­por­tant to Big Oil bosses right now than cash flow. Royal Dutch Shell Plc in par­tic­u­lar has made it a pri­or­ity to turn it­self into a well-oiled cash ma­chine. It’s fo­cused on get­ting the high­est-mar­gin bar­rels out of the ground, and churn­ing money out of its liq­ue­fied nat­u­ral gas trad­ing busi­ness.

In the third quar­ter, the An­glo-Dutch oil ma­jor brought in its big­gest cash haul in a decade, ex­clud­ing work­ing cap­i­tal move­ments. That oblit­er­ated an­a­lyst es­ti­mates for what the com­pany could pro­duce. “We like the di­rec­tion of travel,” said Alas­dair McKin­non, lead fund man­ager at Shell in­vestor Scot­tish In­vest­ment Trust.

2. Show me the money

The big ques­tion from share­hold­ers: are com­pa­nies go­ing to use all that money to pay us? The an­swer is yes. Most com­pa­nies ac­cel­er­ated or con­tin­ued share re­pur­chase pro­grams, sig­nal­ing con­fi­dence the dark days of the crude slump are gone. There were con­trasts, though -- Shell is go­ing faster than any­one, while Exxon Mo­bil Corp. has yet to dis­cuss re­sum­ing buy­backs.

3. Sav­ing for a rainy day

While oil com­pa­nies may be en­joy­ing surg­ing cash -- and hand­ing some of it back to in­vestors -- al­most no one has any in­ter­est in boost­ing cap­i­tal spend­ing, at least for now. Ev­ery ma­jor com­pany ex­cept for Exxon pledged to keep cap­i­tal ex­pen­di­ture at a near-decade low for the fore­see­able fu­ture.

They see this as im­por­tant to win­ning back the con­fi­dence of share­hold­ers. The value of the com­pa­nies eroded from 2014, af­ter they found them­selves locked into ex­pen­sive mega-projects dur­ing a ma­jor crude price col­lapse.

4. Debt dilemma

The other big ques­tion from share­hold­ers: what about debt? Hav­ing low debt means hav­ing more fire­power and flex­i­bil­ity to do deals as well as ride out the next mar­ket down­turn. Yet debt hasn’t re­ally de­clined that much from a year ago, re­flect­ing the fact that these com­pa­nies have only re­cently started gen­er­at­ing enough cash to cover share­holder dis­tri­bu­tions and their cap­i­tal bud­gets again.

5. Cri­sis of con­fi­dence

Even af­ter all their hard work, in­vestors are still un­cer­tain of the in­dus­try’s com­mit­ment to fi­nan­cial dis­ci­pline. Shares of oil com­pa­nies in both Europe and the U.S. have lagged the gains in the crude price through­out 2018. Shell’s mon­ster cash num­bers posted Thurs­day didn’t pre­vent a sell-off. In­vestors were more en­thu­si­as­tic about Exxon and Chevron -- both rose in New York af­ter re­port­ing earn­ings.

Even for Shell, most an­a­lysts think the dis­ci­pline is real, and it will just take more quar­ters of con­sis­tently good de­liv­ery to see the stock price catch up.

“While quar­terly volatil­ity may be off-putting for some, even when to the up­side, we think Q3 pro­vides good ev­i­dence that Shell’s fi­nan­cial frame­work can work,” said Bi­raj Borkhataria, at RBC Cap­i­tal Mar­kets, in a note. “In our view the shares are ma­te­ri­ally un­der­val­ued at these lev­els.”

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