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What will big oil do with surplus cash?

written by Remo Bebié

The second quarter (Q2) earnings season provided new insights into what to expect from the oil and gas sector in terms of capital expenditure plans in an environment of high oil prices. In an earnings season preview, Bloomberg noted "dividends, buybacks and projects that start generating profit quickly" as priorities for investors. Results are already in for Total, Shell, Exxon, Chevron, Equinor (Statoil) and Repsol. Total saw its net profit increase by 44%, beating analyst expectations. The French oil major also raised its production growth target to 7% in 2018, from 6% previously. The company's leadership remains committed to discipline on spending, despite rising oil prices (Reuters, Financial Times).

Shell's second quarter net income came far short of analyst expectations. The company announced a $25 billion buyback plan and said that it had completed its three-year, $30 billion asset divestment program. It now plans to divest around $5 billion per year going forward (Reuters).

Exxon's senior vice presiden Neil Chapman called the second quarter earnings a "low point" after the company reported a 7% production decline and missed market expectations on profit by more than 20%. Bloomberg report that Exxon is not ready to resume share buybacks. While Chevron also missed profit expectations, it announced a $3 billion stock buyback program (CNBC, CNN, Times, Bloomberg). Equinor and Repsol also both missed profit expectations (Reuters, Financial Times). BP are scheduled to announce results tomorrow.

In recent months, various oil majors announced investments in low-carbon technologies. In late June, BP bought Chargemaster, the UK's biggest car charging firm, for £130 million. Equinor recently purchased Danish power and gas trading company Danske Commodities for €400 million, while Total acquired a majority stake in electricity retailer Direct Energie in April (Financial Times).

Most of these deals are small compared to the firms' total capital expenditure. When Shell announced it would double its clean energy spending last November, the Guardian compared the planned annual spending of £1-2 billion to the much larger planned investment in conventional oil and gas and deepwater exploration. BP CEO Bob Dudley recently told the Washington Post, “If someone said, ‘Here’s $10 billion to invest in renewables,’ we wouldn’t know how to do it”.

The Financial Times write that oil producers are currently facing their "life or death" question, as they determine capital expenditure in an environment of high oil prices and a potential peak in demand. Strategies appear to vary company by company: Shell CEO Ben van Beurden told investors that "Shell is no longer an oil and gas group, but is an 'energy transition company'”. In a story headlined "Exxon CEO’s Solution on Shares: Drill Big, Drill Better", Darren Woods told Bloomberg that the company bought resources during the downturn and is now planning to spend about $200 billion over the next seven years developing them. He also announced that share buybacks will come only if there’s excess cash. The Financial Times report that some oil majors are already returning to deepwater drilling.

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