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

LONDON • Oil companies saw soaring profits during the third quarter (3Q) 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 3Q earnings season:

1. It’s All About the Cash

There may be no number more important to Big Oil bosses right now than cashflow.

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 3Q, 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.

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 programmes, signalling 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 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.

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 US have lagged the gains in the crude price throughout 2018. Shell’s monster cash numbers posted last Thursday didn’t prevent a sell-off. Investors were more enthusiastic about Exxon and Chevron Corp — 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 catching up. — Bloomberg