BP and Royal Dutch Shell reported their latest financial figures for the third quarter and both companies showed some improvement, a sign that the oil markets are starting to find their footing.
A few days ago, some of the other oil majors released third quarter earnings, revealing the ongoing damage being done to the balance sheets of even the largest oil companies. But BP and Shell offered some reasons for optimism for the industry.
Shell said that its current cost of supplies – similar to net income –
BP’s replacement cost profit was
Both companies believe that things are turning a corner. BP said that it expects cash flow to improve by $2 billion to $4 billion in 2017 because of higher oil prices. The British oil giant also expects “to see the full cumulative benefits of our cash cost reductions” next year.
But there are some very worrying signs for Shell and BP, which are similar to the problems that the other oil majors face. Shell’s gearing – a ratio of net debt to total equity – jumped from 12.7 percent in the third quarter of 2015 to 29.2 percent by the end of September 2016. A higher gearing ratio is problematic because it points to a more indebted company that could have trouble paying back debt if market conditions remain poor, which also represents a threat to equity holders. BP’s gearing ratio rose to 25.9 percent this past quarter, compared to 20.0 percent a year ago.
Since there is little to no chance of an issue with meeting debt payments, the likely casualty if oil prices remain low would be even deeper capex cuts, more layoffs, and deferred projects. After that, the next thing to be axed would be dividends.
“I’m always deeply suspicious about companies that are paying uncovered dividends and effectively paying today and not investing for tomorrow, which appears to be what is going on here,” Charles Newsome, divisional director at Investec Wealth, told
Jefferies Equities analyst
But much of that depends on oil prices continuing to rise. And on that front, the oil majors are not out of the woods yet. Despite their cost savings over the past two years, the companies cannot maintain such generous dividend payouts if oil prices fall much further than current levels.
Oil is facing a pretty significant downside risk should OPEC fail to come to an agreement at the end of the month. The
“The lack of progress on implementing production quotas and the growing discord between OPEC producers suggests a declining probability of reaching a deal on November 30,” Goldman Sachs
That would erase the little bit of optimism that the top oil executives have exhibited in recent days, and it would call into question the sustainability of their dividend payments.
By Nick Cunningham of Oilprice.com
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