Oil Majors in Serious Trouble

Contrary to the corporate media touting the return of investors and rebirth of drilling activities in the tight oil patches as indications that all is well again with the oil industry, a small minority in the blogosphere including this space here has been shouting from the rooftop that the global oil industry is in the midst of a fundamental transformation, a transformation which will render it completely unrecognizable within a decade and possibly as soon as five short years.

And this will happen with or without climate change; Trump or no Trump.

Another data point supporting this contrarian view, courtesy of SRSrocco Report, further reinforces that the entire oil and gas industry is in trouble, starting right at the top with the big three of the majors.

To wit:

The combined net income of ExxonMobile, Chevron and ConocoPhilips has gone down over 95% since 2011, from $80.4 down to $3.7 billion.

And that’s the good news. It gets worse from here.

Their combined free cash flow (net income minus capex) went from $46.3 in 2011 to -$7.3 in 2016. And that is after they managed to slash capex by 46% ($20 billion) since 2013.

And if you include dividend payouts, you get this picture of the majors seriously bleeding cash in the past few years, as the chart below illustrates.

Since the free cash generated from operation is unable to cover the dividends payouts, the only way to cover the shortfall is to borrow money to pay dividends, as is done by a great number of S&P 500 companies which are desperately trying to prop up their share prices by raising debt to buy back their own shares. As evidenced in the chart below, the Big Three more than doubled their debt since 2011.

And if you think only the majors are suffering but the tight oil companies are alive and well again, as judged by the investment frenzy again in the Permain play, just look at the collective and individual cash flows of the top tight oil companies in the chart below. No comments required.

Just to recap:

  • At current depressed low prices, the majors are seriously bleeding cash, not just the tight oil companies.
  • Geologically challenging projects (arctic, deep ocean) are shelved indefinitely as the cost of such incremental discoveries are not compensated by the prices. Capex is substantially curtailed, ensuring a supply shock down the road.
  • The companies are borrowing money to pay dividends and to prop up their own share prices. This is behavior of enterprises in liquidation mode.

Peak oil

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