As Cash Flow Cues Recovery, Big Oil Looks Past Profit Crunch

The answer to the question “what’s the difference between income and cash flow?” to any oil-company accountant and they’re likely to say income makes the headlines, cash pays the bills.

There’s a nub of truth there even though it may be glib. Cash generation has been growing at the biggest oil producers for three quarters in a row as it is the yardstick used to judge a company’s ability to invest and pay dividends.

Noting a rise of 67 percent from the previous three months and more than double the first-quarter amount, cash from operations of almost $26 billion was reported in the last quarter by the world’s largest listed energy companies — Exxon Mobil Corp., Royal Dutch Shell Plc, Chevron Corp., Total SA and BP Plc.

“The environment’s been tough but we’ve seen robust cash-flow delivery,” Brian Gilvary, chief financial officer of London-based BP, said Nov. 1 on a call with investors.

Higher oil and gas output, rallying crude prices, higher oil and gas output and lower day-to-day spending is reflected by the growth in cash.

“Cash deficits should start to shrink in 2017 as oil prices gradually recover and cost-cutting initiatives continue,” said Maxim Edelson, a senior director at Fitch Ratings Ltd. in Moscow.

When oil majors generated $36.5 billion in the third quarter, cash creation remains lower than a year ago. The top five companies produced more than $65 billion in the first three months of 2008 and it’s well below the heyday of $150 crude at that time.

Indicating that debts continue to rise as enough cash to cover investments in new projects and payouts to shareholders could not be generated by the majors. Up from $46 billion a decade ago, their combined debt totaled $142 billion at the end of September.

But if oil prices stabilize next year above $50 a barrel, cash generation will be strong enough to cover dividends and investments, and even reduce debt with the help of asset sales, oil companies told investors in a show of confidence.

“Our overall financial picture is set to improve in a meaningful way as we move into 2017. Our objective is to get cash balanced in 2017, assuming $50 Brent prices,” Patricia E. Yarrington, CFO of San Ramon, California-based Chevron, said Oct 28.

Barring Shell, in the third quarter, lower year-on-year profits were posted by all of the five majors. Shell reported cash of $8.5 billion, up from $2.3 billion in the previous three months as it saw earnings boosted by its acquisition of BG Group Plc. That allowed Europe’s largest oil producer to almost balance its books.

Shell has also been chipping away at day-to-day costs while the BG purchase helps explain the increase in cash. Despite the added cost of running BG. And executives say more savings are coming, operating expenses, or opex, stood at $10 billion last quarter, about $600 million lower than a year earlier.

Shell CFO Simon Henry told investors Nov. 1 on a conference call that opex will fall about 25 percent next year compared with 2015. “Where does it come from? Well, pretty much everywhere,” he said of the cuts.

(Adapted from Bloomberg)

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Categories: Economy & Finance

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