OIL MAJORS BACK TO NORMALCY
BP joins peers, posting better-than expected profit which signals return to growth
OIL supermajors are getting back to their normal way of life after surviving a price slump that shook the foundations of their business.
BP Plc gave the boldest signal yet that the worst of the downturn was over, announcing on Tuesday that it would buy back shares for the first time in three years. After posting third-quarter earnings that comfortably beat estimates, the company’s shares surged to the highest since 2014, joining its closest peer Royal Dutch Shell Plc at a level not seen since the the Organisation of the Petroleum Exporting Countries (Opec) meeting that triggered price collapse.
“What the buyback signals is we’re back into normality,” said BP’s chief financial Officer Brian Gilvary. “We will have to continue to manage the volatility that comes with this market, but we now have a base business that can balance itself at US$49 (RM207.27) a barrel.”
Brent crude, the international benchmark, rose above US$60 a barrel last week for the first time since July 2015 as production cuts by Opec and allies, including Russia, shrink a global oversupply. Results from several of BP’s peers also signalled a return to growth. Total SA reported the highest profit from pumping oil and gas in more than two years, followed by consensus-beating earnings from Chevron Corp and Exxon Mobil Corp — with the latter posting a 50 per cent jump in net income.
While the outlook for the industry has brightened, the heady, free-spending days of US$100 a barrel aren’t likely to return any time soon. The deep cost cuts, mass layoffs and project cancellations that enabled the majors to live a little easier with prices closer to US$50 remain in place, clouding the outlook for production growth years from now. Investors still have their doubts, with energy companies the worst performer this year on the MSCI World Index.
Still, BP’s numbers impressed analysts. Adjusted net income doubled from a year earlier, cash generation rose to near the highest since the slump began and net debt dropped for the first time in two years.
“After three years of the downturn, the buyback is signalling the cost structure has adjusted,” said Jason Gammel, an analyst at Jefferies LLC.
BP will start spending as much as US$400 million a quarter to buy back shares issued to partly cover dividend payouts and conserve cash. Norway’s Statoil ASA confirmed will halt its own scrip dividend from the fourth quarter and Total will end the discount it gives to shareholders who take the scrip from next year.
For the moment, an end to share dilution looks to be about as far as the oil majors are willing to go in loosening their pursestrings. BP would not allow annual capital spending to surpass its “hard ceiling” of US$17 billion until 2021, said Gilvary. It could even be under US$15 billion — US$10 billion less than spending in 2013 — if crude dropped below US$50, he said.
Shell chief executive officer Ben Van Beurden, who will present his company’s third-quarter results today, has said he’s setting the firm up to be profitable with oil prices “lower forever”. Bloomberg