The BP refinery in Lingen, Germany (aerial view with a drone).
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European energy giants face some tough choices this earnings season, with shareholder payouts seen at risk as they look to cut costs amid lower crude prices.
Western oil and gas majors have long sought to keep investors happy through share buyback programs and dividends.
But a multitude of industry headwinds, along with expectations for a particularly weak earnings season, have ratcheted up the pressure, and the commitment to allocate cash to shareholders is vulnerable.
Britain’s Shell and France’s TotalEnergies are both expected to report their lowest fourth-quarter profit in nearly five years when they publish earnings this month, according to an LSEG-compiled consensus of analysts.
European energy companies find themselves in a “very difficult” market environment, with industry players likely to report lower quarterly profits and lower free cash flow, according to Atul Arya, vice president and chief energy strategist at S&P Global Energy.
“So, what will they do? The last thing they will do is cut dividends. They will reduce the buybacks if they have any buybacks and they may have to taper their capital program,” Arya told CNBC by video call.
Brent crude futures over the past month.
Any cuts to capital programs would likely come at the expense of low-carbon projects, Arya said, adding that cuts to exploration and development projects would likely send the wrong message to investors.
“They could maybe take some more debt if they still need cash, although I think most of them do not want to take that. They are all pretty highly leveraged,” he added.
‘Sacrosanct’ dividends
Analysts have said that, as Big Oil faces difficult decisions regarding shareholder returns, trimming share buybacks is likely the easiest option.
Some European energy majors have already done just that. BP in April lowered its share buyback to $750 million, down from $1.75 billion in the prior quarter, after reporting earnings that fell short of market expectations.
TotalEnergies said in September that it had decided to adjust the pace of its share buybacks “to face economic and geopolitical uncertainties and to retain room to maneuver.”
Maurizio Carulli, energy and materials analyst at Quilter Cheviot, described the dividend as “sacrosanct” for oil majors because it helps to shore up capital discipline and prevent excessive expenditure.
Buybacks, by comparison, are more cyclical, Carulli said, and a prolonged period of lower crude prices means oil majors will likely find it tempting to pull this lever first.
“There is some uncertainty about how much companies will consider but it is quite clear that that is the direction,” Carulli told CNBC.
‘Monster profits’
The prospect of reducing quarterly share repurchases reflects a stark change in mood from just a few years ago.
In 2022, the West’s five biggest oil companies raked in combined profits of nearly $200 billion when fossil fuel prices soared following Russia’s full-scale invasion of Ukraine.
Flush with cash, the likes of Exxon Mobil, Chevron, Shell, BP and TotalEnergies sought to use what U.N. Secretary-General António Guterres described as their “monster profits” to reward shareholders with higher dividends and share buybacks.
