• Thursday, March 28, 2024
businessday logo

BusinessDay

Big oil companies reward shareholders to win confidence

Untitled design (23)

Big oil companies are aggressively buying back shares and shoving cash into the pockets of shareholders as they strive to regain investors’ confidence on Wall Street but analysts say this might impair growth and reserves-replacement ratio.

Share prices for the top oil companies rose strongly after the fourth quarter and full-year 2018 results were reported, restoring some confidence in the sector.

Chevron purchased $1 billion in shares while also announcing a $25 billion share buyback programme, pleasing its investors. When Bloomberg asked Brian Gilvary, BP’s chief finance officer what his company’s focus would be in 2019, he said: “Capital discipline, capital discipline, capital discipline.”

The overarching mantra from the oil majors, even after posting fat profits, was that they will prioritise shareholder pay-outs above all else. That was very welcome news for Wall Street.

“Shell, Total and Chevron all began substantial buy-back programmes during the year. This was the first important signal to investors: returning cash to shareholders ranked higher than growth expenditure,” Norman Valentine wrote in a WoodMac report. “Bolstering defensive credentials seems an important step towards regaining investor confidence.”

BP repurchased 2 million ordinary shares at a cost of $16 million, including fees and stamp duty, during the fourth quarter of 2018. For the full year, BP repurchased 50 million ordinary shares at a cost of $355 million, including fees and stamp duty.

“We expect to continue our share buyback programme and to fully offset the impact of scrip dilution since the third quarter of 2017 by the end of 2019” Bob Dudley, group chief executive said.

Total Plc has repurchased shares issued in 2018 under the scrip dividend option in order to cancel dilution related to the exercise this exercise; 21.60 shares were bought back in the fourth quarter of 2018 and 47.20 million shares in 2018. Additional shares were repurchased for $500 million and $1.50 billion in 2018.

Shell has started implementing its $25 billion buyback programme and plans to complete this.

Energy analysts say it is not clear how the oil majors will navigate the turbulent waters in the years ahead. For now, they are focused on boosting short-cycle output, investing in downstream assets that they believe will be more resilient, and returning excess cash to shareholders.

“The key going forward will be maintaining discipline. This is now a low-growth industry, so you’ve got to invest well,” Brian Youngberg, an analyst at Edward Jones, told the Wall Street Journal.

According to Reuters, while giants such as Total and Eni revamp exploration in-house, BP and Royal Dutch Shell have been more open to having partners do the heavy lifting of exploration in certain geographies.

Kosmos Energy and BP, for example, joined forces to hoover up exploration licenses in the northern part of the African Atlantic, rather than competing against each other.

In October, Kosmos entered a similar partnership with Shell to search for new oil off southern Africa.

“Having a built-in partner with a supermajor from the beginning is very different and allows us to share cost and share risks from the inception of a project,” said Kosmos’ exploration chief Tracey Henderson.