Oil majors have a high-quality problem: what to do with their heaps of cash. The impact of the Iran war on oil and gas prices has left them with a windfall. But given the uncertainty over how long hostilities will last, and what the world will look like afterwards, it is hard for them to do anything particularly useful with it.
As an idea of the numbers involved, Exxon, Chevron, Conoco Phillips, Total Energies, Shell, BP, Eni and Equinor are expected to make over $350bn of operating cash flow this year, according to analysts polled by S&P Capital IQ, or about 50 per cent more than they did last year. Yet despite coming into way more money than they could have predicted at the start of the year, they have barely shifted their investment levels. Huge free cash flows are therefore flowing on to balance sheets, especially for relatively indebted companies such as BP, and to shareholders.
Shell, for example, lifted its quarterly share buyback by two-thirds to $5bn in the third quarter. European oil producers are set to return a little more than 7 per cent of their market capitalisation in the form of buybacks and dividends this year, according to Goldman Sachs analysts. On the one hand, it is hard to blame the majors for steering a constant course.
Trying to establish whether, in a few months' time, the Strait of Hormuz will be open, closed or somewhere in between is a bootless errand, with oil-market outcomes that range from penury to glut. Indeed, the mere hope that President Donald Trump's midterm defeat might produce a speedy end to the Iran conflict sank the oil price, which is down more than 15 per cent since last week. What's more, oil and gas is a long-lead business where new investable oilfields cannot simply be magicked up.
There are signs that the oil majors have started to invest in the early stages of the next growth cycle: Norway's TGS, which provides data to help companies locate new resources, is seeing strong bookings for its marine mapping systems. But these are small, early-stage investments. Even if oil companies had some confidence that the current bonanza was going to continue, the only way to put a lot of cash to use quickly would be to buy a rival.
And rising commodity prices arguably make that harder rather than easier, because they lift the distressed more than the well capitalised. As things stand, Big Oil will struggle to find ways not to waste this particular crisis.
Source: Financial Times Companies · Summarized by HeadlinesBriefing