The Trouble with Big Oil in One Chart
In the wake of the global oil supply surplus since the second half of 2014, a product of
- the global economy teetering ever closer to a worldwide recession,
- the US tight oil industry over-producing at a loss thanks to the endless supply of practically free OPM from blind yield-starved investors driven insane by the equally insane zero interest rate policy from the world’s top central banks, and
- a desperate Saudi intent on jacking up production in order to maintain market share, punish Russia for its Mideast foreign policy and drive the US shale oil companies into insolvency,
the dire situation of the tight oil industry, which has been until this point riding the wave of the ‘US shale oil revolution’ and a situation which has been frequently covered in this space (here, here, here and here), is by now fairly well known.
What is becoming more apparent is that the situation is not confined to tight oil and other unconventional oil producers like the tar sands, the price structures of which are considerably higher than those of the conventional oil producers.
Big Oil is also feeling the intense pressure imposed by the latest sustained price drop. A picture presented in a recent BP investors’ presentation, courtesy of this article, paints those proverbial thousand words.
Whereas in 2014 the cash flow from operation barely covered capital expenditure (capex), dividends to shareholders and share buybacks to goose up P/E (ignoring the expenses associated with the Gulf of Mexico oil spill cleanup), the combined sum of cash flow from operation and asset disposals is not enough to cover capex and dividends in the same period in 2015.
With no new driver pushing oil prices higher, barring any unforeseen geopolitical events in the Mideast, its revenue, and, hence, underlying cash flow, is unlikely to improve any time soon. Also noticeable is that share buybacks, which have been arguably the primary driver of ever higher stock prices post-QE3, is no longer in the offing. Furthermore, selling assets in an already depressed market will continue to keep asset prices low. The company in all likelihood will further slice capex in order to reduce costs, a move which will negatively affect future output which will further impact revenue. Vicious circle at play here.
Oh, one lever not yet mentioned: dividends. As unpalatable as such might be, a decision by any prudent management to cut dividends would be anything but surprising. Investors attracted to the juicy yield of its shares be warned.
And BP is certainly not alone among the majors. According to Moody’s, Big Oil will collectively face a 20% contraction in their cash flows, $80 billion of negative cash flow in 2015, compared with $26 billion in 2014.