Big Oil Flush With Cash Again, But No Party Yet
LONDON, Jan 24 (Reuters) - The world's top oil companies are expected to generate more cash in 2018 than at any other time this decade after three painful years of cuts, but it isn't party time yet.
The shift in sentiment has been rapid as crude prices have risen by more than 50 percent over the past six months to reach $70 a barrel, a level not seen since the crash year of 2014, thanks to global supply cuts led by OPEC.
Only a year ago, many investors still fretted over the sustainability of the sector's lavish dividend payouts in a weak energy market. Now the focus on company boards is gradually switching from slashing jobs and investment to boosting shareholders' returns and growth.
With memories of the 2014 price collapse still fresh and oil forecast to recover only slowly, frugality remains high on the agenda of boards and investors to ensure that the energy majors produce enough cash to pay dividends while reducing debt that ballooned during the downturn.
"The companies will need to demonstrate over time that lower capital spending can be sustained and that their dividends will remain fully covered," said Jonathan Waghorn, energy fund manager at Guinness Asset Management, which holds shares of Chevron, Total and BP.
"We are cautiously optimistic on their ability to do this, given the dramatic cost reductions in the industry."
Oil majors responded to the crisis by transforming their businesses, nearly halving spending, culling tens of thousands of jobs and diluting share value.
In 2017, most companies showed they can adapt to a world of lower prices and even generate thin profits with oil at $50-$55 a barrel, without borrowing.
This year, when prices are expected to hold around $60 a barrel, the majors will generate more cash than they did in 2011 when a barrel of crude traded at an average of $112, according to BMO Capital Markets analyst Brendan Warn.
Dutch Shell appears the strongest performer among the group in terms of organic free cash flow - money available to return to shareholders in dividends and share buybacks after deducting capital spending, excluding revenue from disposals.
Shell alone will account for a quarter of the roughly $80 billion of organic free cash flow that the top seven oil majors are expected to generate in 2018, Warn said.
This follows the Anglo-Dutch company's scrapping at the end of last year of its scrip programme. These allow investors to opt to receive dividends in shares, saving the companies cash upfront but diluting their earnings per share.
Shell's organic free cash flow yield, the ratio between cash flow and market capitalisation, is set to double in 2019 from 2011-2014 to 8.84 percent, according to BMO.
The comparative yield for Exxon, though a larger company than Shell, will be only 5.39 percent, BMO forecast. BP's yield will rise in 2019 to 6.55 percent while that of Chevron will reach 7.16 percent.
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