The Consequences Of Big Oil’s Exploding Debt

How do you ride out low oil prices and still pay dividends and CEO salaries? You double down on debt, apparently.

All oil majors posted plunging profits or accumulated losses in the second quarter, blaming low crude prices and weak refining margins for these results that missed estimates—in some cases by wide margins. All saw cash flows shrinking, and yet, all kept dividends intact and vowed to continue investing in their respective major projects.

Quite naturally, all these factors have led to supermajors amassing more and more debt since crude oil prices started slumping in 2014.

Estimates by Bloomberg have shown that oil majors have doubled their combined debts to US $138 billion since 2014. That’s also a staggering tenfold jump from the 2008 total oil major debts.

Looking at the Q2 balance sheets of some oil majors, we see debts rising, cash flows dropping, capex diminishing, but dividends firmly held, and in Exxon’s (XOM) case, even raised by 2.7 percent compared with the second quarter of 2015—the same quarter in which Exxon’s earnings plunged 59 percent annually.

Another U.S. oil major, Chevron (CVX)—which swung to a US $1.47-billion net loss in the second quarter—reported a total debt of US $45.085 billion as of June 30, 2016, up from US$38.549 billion at the end of December 2015, while cash and cash equivalents dropped to US$8.764 billion from US$11.022 billion. Cash flow from operations shrank to US$3.7 from US$9.5 billion. Capex declined to US$12 billion from US$17.3 billion. But interim dividends were diligently kept unchanged, lest shareholders be disappointed by their returns.

Dividends were also held steady at BP (BP), whose second-quarter profit plunged to US $720 million from US$1.3 billion for the second quarter of 2015. In the group’s own words, “refining margins were the weakest for a second quarter since 2010.”

BP’s US$1.9-billion proceeds from divestments in the first half of 2016, and organic capex reduced to US$7.9 billion from US$8.9 billion, were not sufficient to offset the lower operating cash flows amid the challenging environment. And BP saw its net debt rise to US $30.9 billion at end-June from US$24.8 billion a year earlier. Net debt ratio jumped to 24.7 percent from 18.8 percent.

It would appear that BP’s CEO Bob Dudley, is not terribly concerned about borrowing money to keep on paying dividends. “Money is so cheap right now,” Dudley told Bloomberg in an interview after the group announced its second-quarter figures. “I’m not at all uncomfortable in the 20 percent to 30 percent range,” the manager added, commenting on BP’s much higher gearing.

Indeed, money is cheap these days, with interest rates and borrowing costs at historic lows, as central banks are trying to spur economic growth and investments. The question is, will it be cheap for BP to continue amassing debt when the time comes to pay down those debts.

BP has also spent millions of dollars on top executive pays in recent years, when such a splurge seemed inappropriate amid record losses and en masse lay-offs. Finally, earlier this year, shareholders rebelled against Dudley’s pay and voted down a proposed 20-percent hike in the CEO’s remuneration.

Debt is also an issue with another European supermajor, Royal Dutch Shell (RDS.A), which disappointed analysts with second-quarter profits missing estimates by US$1 billion. Shell’s debt surged to US $75.1 billion at end-June from US$26.624 billion at end-2015, primarily due to the borrowing it had to take on to support its US$54-billion acquisition of BG. Analysts predict that Shell’s debt will rise more in the coming quarters, before starting to shrink with potential synergies and cost savings.

Actually, all oil majors are likely to increase debts in the next few quarters, with crude prices still barely hovering around the US$40 mark, after dipping to US$39 early last week. Asset sales and investment shifts to higher-margin projects will not be able to compensate for lost revenues in both upstream and downstream, at least not until the end of 2016. What’s more, we are now headed towards seasonally weaker demand after the summer peak demand for oil has ended, and before winter demand settles in.

In addition, global demand may have somewhat declined, but oversupply is still strong. In late July, the World Bank raised its 2016 crude price forecast to US $43 from US $41 per barrel, but warned that inventories were still high and would take time to draw down.

Although crude prices now are a far cry from the US $26 twelve-year-low from February, but most majors have factored in oil stable at US $50 for sustainable business.

At any rate, in the current price environment, oil majors cannot afford to stretch their budgets for much longer—despite hefty cost cuts—simply because they are not generating more than they are spending. And they will continue to streamline costs and may resort to more capex reductions. That’s at least more likely than cutting the precious dividends.

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14 Comments on "The Consequences Of Big Oil’s Exploding Debt"

makati1 on Wed, 10th Aug 2016 7:55 am 



This week on Rice Farmer:
“20 Months, 90 Bankruptcies In North-American Oil & Gas”
“China Crude Imports Fall to 6-Month Low as Teapot Demand Slows”
“Energy Industry Job Cuts Hit 195,000”
“US Oil, Gas Industry Sees 26% Decline in Employment”
“Oil prices plummet amid continued oversupply, with no end in sight”
“UK Sees Oil & Gas Profits Sink To 20 Year Lows”

The ability to purchase oily products is shrinking faster than producers are able to cut production.

Also on Rice Farmer:
“McKinsey Study Shows 81% of US Worse off Than in 2005, France 63%, Italy 97%”
“One in three families are a month’s pay from losing homes, says study (UK)”
“Soaring Debt Has U.S. Companies as Vulnerable to Default as 2008”
“U.S. productivity falls for third consecutive quarter”
“Japan Inc. profits languish on yen, dull consumption”
“Spending by child-raising families in deep slump: white paper”
“So Long, Middle Class: Middle-Income Jobs Are Disappearing the Fastest”
“95 million Americans not in the labor force: The army of non-workers in the United States.”
“Revealing the Real Rate of Inflation Would Crash the System”
“The Boomerang Generation: Older Millennials are pushing increase of young adults living at home.”
Poverty is moving West…

Kenz300 on Wed, 10th Aug 2016 10:13 am 



Big Oil refuses to admit that the world is changing and moving away from fossil fuels…….. They need to change their business plans and become “ENERGY” companies
by diversifying into wind and solar and reducing their risk. Climate Change is real and it will impact all of us……. even the top 1% will be impacted…….they need to wake up…………..

The Effects Of Growth: Sprawl & Development – YouTube

https://www.youtube.com/watch?v=UA33sraoyCk

Watch The Climate Change Ad Fox News Didn’t Want Its Viewers To See

http://www.huffingtonpost.com/entry/climate-change-ad-fox-news_us_57892a37e4b03fc3ee50c207?section=

Climate Change is real….. we will all be impacted by it……

Exxon’s Climate Change Cover-Up Is ‘Unparalleled Evil,’ Says Activist

http://www.huffingtonpost.com/entry/exxon-evil-bill-mckibben_561e7362e4b028dd7ea5f45f?utm_hp_ref=green&ir=Green&section=green

rockman on Wed, 10th Aug 2016 10:43 am 



They are way overemphasizing long term dept of Big Oil. Big Oil has always used long term debt to fund much of its operations. This allows much of the free cash flow to pay dividens. And dividens are key to supporting the stock price since they are a prime motivation to owning a stock like ExxonMobil.

Consider XOM specifically: long term debt to total assets is a measurement representing the percentage of a corporation’s assets that are financed with loans and financial obligations lasting more than one year. The ratio provides a general measure of the financial position of a company, including its ability to meet financial requirements for outstanding loans. It is calculated as a company’s long-term debt divide by its total assets. Exxon Mobil Corp’s long-term debt for the quarter that ended in Jun. 2016 was $29,499 Mil. Exxon Mobil Corp’s total assets for the quarter that ended in Jun. 2016 was $342,473 Mil. Exxon Mobil Corp’s long-term debt to total assets ratio for the quarter that ended in Jun. 2016 was 0.09. Exxon Mobil Corp’s long-term debt to total assets ratio increased from Jun. 2015 (0.06) to Jun. 2016 (0.09).

Long-Term Debt can be owed to banks or bondholders. Some companies issue bonds to investors and pay interest on the bonds. Usually a company issues long term debt to pay for its capital expenditures. Borrowing allows the company to do things that otherwise cannot be done with only the capital it has.

Which is exactly why XOM is selling mucho $billions in new bonds: building a big war chest so they can go into an acquisition frenzy as a result of the oil price slump. XOM isn’t borrowing money to pay it’s bills…it has more the enough revenue to do that. Historically some of the best XOM investments were acquisitions made during busts. Additionally it’s impossible for it to replace produced reserves with the drill bit: not enough exploration opportunities.

Big Oil isn’t borrowing $billions to avoid bankruptcy. It’s doing it to take advantage of all those Little Oil companies that are dealing with huge debts, insufficient revenue and are rushing towards bankruptcy court. But there’s a time proven method to avoid bankruptcy and for debt owners to walk away with some coins in their pockets: corporate takeovers. And those $billions in new XOM bonds isn’t the end of the story: huge corporate takeovers typically include the acquisition of the wounded company’s debt. But given XOM great credit rating those debtors are thrilled about such takeovers: often those bond holders come away with nothing when a company goes thru a bankruptcy liquidation.

Trust me: while the Big Oil CEO’s aren’t very happy about lower oil prices they are absolutely ecstatic over the prospect of acquiring hundreds of $billions (if not $TRILLIONS) of reserves on the cheap.

As said many times before: the oil patch is always ready to eat our own if the price is right. Cannibalism is a well established business plan. LOL.

penury on Wed, 10th Aug 2016 11:12 am 



I think it was Herb Stein who said “what cannot continue,will not.” and someone else said “the market can stay irrational longer than you can stay solvent.” It looks like the wheels are coming off big time.

Cloud9 on Wed, 10th Aug 2016 12:31 pm 



If evolution is an ongoing process, survival of the fittest rules the day. At the end of the day only the fittest survives. The next day the fittest is forced to eat itself.

shortonoil on Wed, 10th Aug 2016 12:49 pm 



This is what we have been stating would happen for the last couple of years as a result of the entropic decay of the petroleum production system. We have also calculated that it will require $39 trillion over that 10 year period to keep the supply flowing. It will now require the cooperation of the entire world to accomplish this feat. It’s time for the war drums to go silent, and petty human disagreements to be put to bed. Our survival depends on it!

http://www.thehillsgroup.org/

rockman on Wed, 10th Aug 2016 12:57 pm 



Cloud – “At the end of the day only the fittest survives. The next day the fittest is forced to eat itself.” So true. Obviously the Big Oil’s will have to canibalize each other: they actually started that process decades ago. The used to be “Seven Sisrers”…now there are not. Mobil Oil only exists today because Exxon found it convenient to tack it on to there name.

Eventually it’s easy to imagine continued consolidation as depletion continues. The big question will be the dynamics between Big Oil and the NOC’s…national oil companies like Aramco.

shortonoil on Wed, 10th Aug 2016 4:33 pm 



“Eventually it’s easy to imagine continued consolidation as depletion continues. The big question will be the dynamics between Big Oil and the NOC’s…national oil companies like Aramco. “

That is likely to be exactly what happens. The question is how to get around the political back lash. Image CNOC taking out 30% of EXXON, or visa verse. Things like that will be necessary for their survival, and ours, but it is going to be one big pill for the world to swallow.

shortonoil on Wed, 10th Aug 2016 6:35 pm 



If the next question is; how does one go about buying an NOC? After they have gone broke – cheaply. Of course you have to make a deal with the ruling warlord, but 15¢ on the dollar sounds about right. Let’s see what Aramco is selling for in three years.

Rick Bronson on Wed, 10th Aug 2016 9:35 pm 



The sales of many Oil companies have crashed because of the lower oil prices. And there is also a natural gas part of it with some oil companies like Exxon & Shell getting 1/2 of their revenue from gas.

So if we exclude natgas and just count the oil part, the sales is much lower. Look at the webpage below.

There are only 19 Oil companies which have $100 billion + revenue and many of these are NOCs leaving fewer public limited companies.

In 2016-H1, China installed 20 GW of solar energy and if many countries follow this lead, the consumption of natgas will also start declining. Oil companies are borrowing and investing in the belief that the oil prices will cross past $60 / barrel soon. But if the glut persists and the prices stay at $40 / barrel, then they will start racking up the losses and may go to Washington D.C just like the automakers did in 2009.

https://en.wikipedia.org/wiki/List_of_largest_oil_and_gas_companies_by_revenue

rockman on Wed, 10th Aug 2016 10:19 pm 



“But if the glut persists and the prices stay at $40/barrel, then they will start racking up the losses…” You missed my point: when ExxonMobil borrows $15 BILLION of bond money and uses it and $15 billion of its stock to acquire 1.5 BILLION bbls of oil at $20/bbl it’s very doubtful they’ll be racking up any losses. And when XOM develops 300 million bbls of oil in some Deep Water play for $4.5 billion they probably won’t rack up any losses since that oil will cost them $15/bbl. It’s good to remember that the majority of XOM reserve base justified derverlopment when oil was selling for $35/bbl…or less.

But XOM and the rest of Big Oil along with the biggest of the Little Oils function in a very different world then the vast majority of oil companies. And their names will be forgotten just as quickly as the other hundreds of companies that have disappeared over the last 50+ years.

Howard Hull on Thu, 11th Aug 2016 5:47 am 



Rockman, you seem to be an educated and articulate man. Why can you not use the correct word??
Their, not there.

shortonoil on Thu, 11th Aug 2016 8:42 am 



“If evolution is an ongoing process, survival of the fittest rules the day.”

If the overall system becomes stressed highly enough, a point is reached were even the fittest don’t survive. The dinosaur didn’t make it, even though, some of them weighted 60 tons and could run 35 miles an hour. That statement should read, “the fittest survive, if anyone does, however there is no guarantee that anyone will”.

With the occurrence of the ongoing entropic decay of the petroleum production system, coupled with the use of the internal combustion engine that operates with no more than a 20% efficiency, no one is going to make it! The 1930 Model A Ford had almost exactly the same gas mileage as the US auto fleet does today. We are attempting to continue the use 100 year old technology that has become obsolete. We are attempting to use it in a low energy world where it can no longer be supported.

Stating platitudes, and thinking happy thoughts is not going to change the situation one iota.

http://www.thehillsgroup.org/

rockman on Thu, 11th Aug 2016 11:29 am 



Howard – It’s that damn autocorrect. I would turn it off but geologists are notorious bad spellars.