Major Energy Companies Face Tough Choices Amid Falling Oil Prices

By Ron Bousso
LONDON (Reuters) – Major energy companies are set to borrow billions to maintain shareholder payouts or cut share repurchase rates due to declining oil prices following over two years of substantial profits, analysts say.

For decades, major firms have attracted investors by promising steady payouts, even as the transition toward lower carbon energy raises questions about the industry’s long-term viability.

Since the start of 2022, BP (NYSE:BP), Chevron (NYSE:CVX), Exxon Mobil (NYSE:XOM), Shell (LON:SHEL), and France’s TotalEnergies (EPA:TTEF) have distributed over $272 billion in dividends and share buybacks.

The surge in energy prices following Russia’s invasion of Ukraine in February 2022, alongside the global economy’s recovery from the pandemic, led to record profits.

Recent calculations by Reuters indicate that payouts have nearly doubled compared to the previous ten quarters. However, with benchmark crude oil prices dropping below $70 a barrel—its lowest since late 2021—combined with declining refining profits, earnings are expected to fall in the upcoming quarters.

Predictions for 2025
Several banks have recently downgraded their oil price forecasts amid weak demand, and some analysts suggest that 2025 may be considered a lost year for the industry.
With the decline in oil prices and poor refining margins, RBC Capital Markets analyst Biraj Borkhataria anticipates Exxon, Chevron, Shell, and TotalEnergies will maintain flat share repurchases next year. To support this, they may need to borrow money while interest rates are high.
To sustain their buyback rates in 2024, it’s estimated that the companies would require significant loans: Chevron $8.6 billion, Exxon $5.1 billion, TotalEnergies $5.6 billion, Shell $3.8 billion, and BP $3.1 billion.

BP, facing greater debt than its peers, is expected to reduce the pace of its buybacks, while Eni’s returns will depend on its asset sales. Borkhataria emphasized that the ability to maintain distributions depends on the company’s balance sheets and willingness to increase leverage.

UBS analyst Joshua Stone forecasts BP may decrease its buybacks from $7 billion this year to $4 billion in 2025, assuming an average crude price of $75. Shell may cut buybacks by $1.5 billion to $12.5 billion, while TotalEnergies likely will keep its $8 billion rate.

Financial Strain
In its second-quarter results, BP indicated plans for a $14 billion buyback commitment through 2025, aiming to return 80% of surplus cash to shareholders. With $22.6 billion in net debt and an $85 billion market cap, BP leads in debt ratios among oil majors.

A BP spokesperson remarked that their returns guidance remains unchanged and financial discipline is maintained. Other companies such as Chevron, Exxon, Shell, and TotalEnergies did not comment on their planned shareholder returns. Some already tapped cash reserves to fulfill return commitments, with Chevron paying $6 billion in Q2 despite net earnings of $4.4 billion and a debt increase of approximately $2.5 billion from the prior quarter.

Morgan Stanley has also revised its earnings forecast downward, commenting that “share buybacks are maxed out for now.” Jefferies investment bank has adjusted its oil price forecasts for 2024 and 2025, projecting a 22% earnings decline for the sector in the third quarter.

To maintain returns, companies may cut spending, particularly on low-carbon investments, and consider borrowing, cautioned Jefferies analyst Giacomo Romeo. “Tough choices are likely ahead if macro prices fail to rebound,” he concluded.