THE WALL ST JOURNAL

Oil Companies’ Modest Prize: Breaking Even

BUSINESS
Exxon, Shell, Chevron and BP barely cover spending, dividends with
cash


By SARAH KENT / April 2, 2017 8:00 a.m. ET


The world’s biggest oil companies are struggling just to break even.


Despite billions of dollars in spending cuts and a modest oil-price rebound, Exxon
Mobil Corp. , Royal Dutch Shell PLC, Chevron Corp. and BP PLC didn’t make enough money
in 2016 to cover their costs, according to a Wall Street Journal analysis.


To calculate each companies’ free cash flow—the excess cash remaining after costs—the Journal
deducted the firm’s dividends and capital expenditures from its cash from operations. All four
firms fell short of cash flow for the year, although Exxon said it broke even by its own metrics,
which exclude dividends. The analysis also showed that the four companies ended last year with
more debt than they began it.


The firms are showing signs of improvement. For example, Shell and Exxon notched stronger
quarters late last year. However, analysts point to challenges ahead as oil prices hover around
$50 a barrel. BP says it will need oil at $60 a barrel to balance cash generation against capital
expenditures and dividends, while Chevron is targeting $50 a barrel with the help of asset sales.
Investment bank Jefferies estimates neither Shell nor Exxon require more than $50 a barrel,
though those companies don’t disclose break-even prices.


For companies once known as profit machines—whose executives were hauled before Congress
in 2005 to explain their enormous earnings—their cash problems demonstrate just how
unprepared they were for a historic crash and tepid recovery in oil prices. They have maintained
the same large dividends they had when oil prices were over $100 a barrel, piling on debt and
selling off assets to prioritize shareholders above all else.


Cash Conversion
Big oil companies have struggled to break even...


Cash from operations less dividend payments and capital expenditure, in billions

 

 

...despite the oil-price recovery that began last year.

Brent crude-oil, price a barrel

 

...and they have huge debt piles amassed during the downturn.
Net debt , in billions

 

Their profits remain under pressure...
Net profit, in billions

 

Sources: S&P Global Market Intelligence (profit, debt); S&P and the companies (cash flow); WSJ Market Data Group
(Brent)


The result is that spending on dividends and capital investments has ballooned above cash
generated from their businesses. The issue has worried investors who expect those steady
dividends because oil giants don’t have the capacity to grow much. Exxon, Shell and their
competitors are under pressure to show they can drum up cash to keep shelling out dividends.


“Since the oil price collapsed, it’s been all about who’s fastest down the road to breaking even,”
said Iain Reid, a senior analyst at Macquarie Capital. “In the short term, it’s all about cash flow
because people are still worried about the dividend.”


Exxon, Shell and their peers spent much of the past three years scrambling to reassure investors
that their dividends were safe amid the oil-price crash. These companies were already struggling
to live within their means at elevated oil prices.


In response to the tumble in prices, the companies laid off thousands of workers, slashed billions
in spending and piled on debt to protect the payouts. Despite disappointing profits last year, they
say that medicine is now working.


Both Exxon and Shell managed to break even in the final quarter last year. In the fourth quarter,
Exxon generated $400 million more than it spent and Shell made $1.2 billion over its outlays,
according to the Journal’s analysis. However, for the full year, Exxon spent nearly $7 billion
more on developing new projects and dividends in 2016 than it generated in cash. Shell’s costs
last year were around $11 billion above its cash generation, the Journal’s analysis shows.


“We are right in the middle of transforming the company,” Shell Chief Executive Ben van
Beurden told the CERAWeek conference in Houston in March. “We are going to be able to
produce a free cash flow that is going to be more than twice as high as it was in the $90 era, but
this time in a $60 world.”


In a sign that investors remain fixated on companies’ cash flow position, BP’s share price
tumbled around 4% when the company upgraded its break-even oil price to $60 a barrel in
February.


International benchmark Brent crude hasn’t hit that level since the middle of 2015.


“The ultimate goal of the company is to generate excess free cash flow,” BP Chief Executive
Bob Dudley said in a March interview in Houston. The company has seven new projects starting
up this year and nine more under way that will add 800,000 barrels a day of new production by
the end of the decade, pushing up returns.


BP expects to drive its break-even price back down toward $55 a barrel by the end of the year
from about $60 now.


“The message going forward is good,” Chevron Chief Executive John Watson told analysts in
January. “Four years ago, I wouldn’t have thought that would be the case at moderate prices.”


But all of the companies’ ability to break even rely on forces outside their control, especially oil
prices.


In February, investment banks predicted oil prices would average about $57 a barrel this year,
according to a Wall Street Journal poll. Analysts said prices could fall short of that mark
depending on how quickly U.S. shale producers ramp back up and whether the Organization of
the Petroleum Exporting Countries can maintain its agreement with other major oil producers to
reduce output.


Chevron’s $50-a-barrel break-even threshold relies in part on support from asset sales. Shell also
is leaning heavily on plans to divest $30 billion of assets by next year to help it bring down its
elevated debt levels. At the end of last year, the four companies’ combined net debt amounted to
$186.3 billion.


“This is the year when their credibility will be tested,” said Jefferies analyst Jason Gammel,
referring to big oil companies. “Some are more capable than others.”


Even Exxon, the world’s biggest publicly traded oil company, is showing rare signs of weakness.
The company wrote down the value of more than $2 billion in U.S. assets earlier this year and
shaved a chunk off its reserves estimates because of Securities and Exchange Commission rules.
It ended 2016 with net debt totaling $39.1 billion—the highest debt level in the company’s
history.


Exxon said its balance sheet remains stronger than those of competitors.


—Bradley Olson contributed to this article.


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