Oil sector off the boil: what happens now?

BP has announced its lowest quarterly profit since Covid, says Tom Wilson in the Financial Times. Lower oil prices and weak refining margins weighed on the group’s performance. The 30% year-on-year drop in third-quarter earnings to $2.27 billion will “maintain pressure” on CEO Murray Auchincloss, whose pledge to make BP “simpler, more focused and higher value” has so far “struggled to boost performance”. BP will buy back another $1.75 billion of shares but promised to review the level of buybacks next year.

While BP has opted to “soften the ground” by talking about reviewing the payout, “anyone can see the direction BP is taking”, especially as its shares are near a four-year trough, says Bloomberg’s Javier Blas. BP is now “worth less than during the worst moment of the Gulf of Mexico oil spill in 2010”.

It was only able to keep dividends unchanged by taking on leverage, with the result that it is “the most indebted, relative to its size and cash generation, among the Big Oil companies”. Given that “the credit rating comes ahead of the shareholders”, payouts of $1 billion per quarter next year would be more realistic.

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Oil sector outlook

It’s not just BP that is feeling the pinch. The “cork-popping years” for America’s biggest oil companies may also be nearing an end, says Collin Eaton in The Wall Street Journal. Exxon and Chevron also posted lower third-quarter profits. Both companies believe that cost-cutting and reduced spending since Covid have prepared them for the worst, with both firms saying they plan to protect shareholders’ payouts. But with a glut keeping prices low, some smaller shale drillers are set to cut buybacks and dividends.

Perhaps the only energy company with good news for shareholders is Shell, says Derren Nathan of Hargreaves Lansdown. It significantly beat earnings expectations thanks to a strong performance in all parts of the company except renewables. This has given management the confidence to “push the button” on a $3.5 billion buyback, the 12th consecutive quarter where plans to buy back $3 billion or more have been announced, while “still managing to shrink its net debt pile”. However, while it seems to be “finding the right balance between rewarding shareholders and investing in growth”, any further pullback in investment “could raise some questions on the group’s ability to future-proof the business”.

Even companies sensibly managing capital and bracing for the energy transition will struggle when there’s too much oil, says Robert Cyran for Breakingviews. Such a day could come sooner than many think, especially as oil cartel Opec and its allies are “sitting on record spare capacity”. Meanwhile, the growth in global demand is likely to slow down, driven by the spread of electric vehicles, which now account for 23% of new car sales. With the International Energy Agency estimating that supply capacity will exceed demand by eight million barrels a day by 2030, investors should “drill for investment ideas elsewhere”.

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