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After capex cuts, majors could halt buybacks, cut dividends as breakeven sinks

With the collapse of global oil prices, the integrated oil and gas majors may need to unleash an arsenal of tactics to preserve their balance sheets and achieve cash flow neutrality as prices flirt with near 20-year lows.

Lower-for-longer crude oil prices will not only trigger capital expenditure cuts by the integrated oil and gas majors but could also prompt them to suspend share buybacks, re-introduce scrip dividends, and eventually reduce dividends to preserve cash and minimize their leverage to oil prices that have now fallen below $30 per barrel and cash breakeven levels that have tumbled more than 50%, according to analysts.

"Deep spending cuts across the board are needed to achieve cash flow neutrality at US$35/bbl in 2020," Roy Martin from Wood Mackenzie's corporate analysis team said in a March 19 note.

First and foremost, the majors will use their balance sheets to protect current dividends in the near term, but dividend coverage erodes rapidly depending on how much further oil prices fall and how long it takes for them to recover, analysts said.

"Balancing the books at US$30/bbl in 2020 is possible for many companies. But tough decisions would be required. Over US$75 billion in 2020 discretionary [exploration and development] capex and US$80 billion of shareholder distributions [would need] to be cut breaking a few promises to investors," Martin added.

"Big oils will likely become cash flow neutral with 20-30% reductions in spending, borrowings, and the elimination of share repurchase plans," Evercore ISI analyst Doug Terreson said in a March 19 note to clients.

Since March 9, global oil prices have cratered due to the price war between OPEC and Russia as well as demand destruction created by the coronavirus pandemic. West Texas Intermediate crude oil futures settled March 19 at $25.22/bbl, up 23.8% on the session but down 58.7% year-to-date. Brent crude oil futures closed at $28.47/bbl on March 19, rising 14.4% on the day but still down 56.9% year-to-date.

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Oil price decks continue to shift lower

Difficult oil market conditions are expected to persist for some time. S&P Global Ratings on March 19 dropped its Brent crude oil price forecast for this year to $30/bbl, from $40/bbl previously, and trimmed its WTI price projection to $25/bbl, from $35/bbl.

That same day, Fitch Ratings cut its Brent crude oil price forecast for 2020 to $41/bbl, from $62.50/bbl previously, and slashed its WTI crude price outlook for this year to $38/bbl, from a prior projection of $57.50/bbl.

On March 17, Goldman Sachs analysts lowered their second-quarter Brent price forecast to $20/bbl, from $30/bbl previously, and left their third-quarter and fourth-quarter outlooks unchanged at $30/bbl and $40/bbl, respectively. Goldman Sachs dropped its second-quarter WTI price forecast to $20/bbl, from $29/bbl previously, but left third-quarter and fourth-quarter projections at $28/bbl and $37/bbl, respectively.

Companies like Exxon Mobil Corp. and Royal Dutch Shell PLC are most exposed to the ongoing oil market turmoil since they have the highest cash breakeven levels — the oil price required to cover spending and dividend payouts to shareholders.

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After the price slide in 2014, it took several years for the oil sector to adjust to prices around $50/bbl. The big question remains — can the majors survive with prices on either side of $30/bbl for the next year or two?

Terreson said that $40/bbl Brent is manageable if the majors cut capex, cancel buybacks and proceed with asset disposals as planned. However, Brent at $30/bbl would prompt companies to reintroduce scrip dividends and/or trim dividends.

"At a flat $40 Brent price, the situation is bearable assuming the other levers — capex cuts, no buybacks, no meaningful dividend growth — are pulled," Jefferies analyst Jason Gammel said in a March 15 note to clients. Gammel added that he has eliminated all buybacks and dividend increases in models through 2025.

However, Morningstar analyst Allen Good said that a healthy dividend is key for the integrated oil majors to attract investors. "The spike in dividend yields to all-time highs suggests the market believes a dividend cut for many firms is likely. We disagree and think dividends are largely safe thanks to an ability to increase debt in the near term," Good said March 17.

Exxon, the U.S.'s largest publicly traded energy company, said in a March 17 Form 8-K that it reached a deal to raise $8.5 billion in new debt. The Federal Reserve launched a funding facility that same day to try to shore up the commercial paper market, where rates have jumped in recent days and have made it more expensive for companies to borrow short-term. At the end of December 2019, Exxon's debt was $46.9 billion.

Capex, cost cuts will be coming

The day prior, Exxon acknowledged that it was evaluating "significantly" reducing capital and operating expenses in the near term due to the economic and oil price crisis. Merely two weeks earlier, at its annual investor day, Exxon said it was "leaning in" to the market and would plow ahead with its aggressive capital expenditure plan through the middle of the decade. Unlike most of its peers that had already been keeping a lid on capex budgets, Exxon laid out an aggressive plan to spend $33 billion this year and an average of $30 billion to $35 billion annually from 2021-2025.

In light of the recent price collapse, Chevron Corp. was the first major to confirm that it was looking at ways to cut costs and reduce spending, calling into question its plans to spend between $19 billion and $22 billion annually through 2025 and return as much as $80 billion to shareholders through that period.

Additionally, London-based BP PLC could cut capital spending by as much as 20% from 2019 levels, CFO Brian Gilvary said in a March 16 interview with CNBC. BP spent $15.2 billion in 2019.

Even before the recent price crash, executives from Royal Dutch Shell PLC said the major would slow the pace of its massive $25 billion share buyback program after weak energy prices and margins took a chunk out of its fourth-quarter 2019 earnings by almost 50% on the year.

This S&P Global Market Intelligence news article contains information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.