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Big Oil Firms Finish 2017 on a High Note: What's Ahead?

Zacks Equity Research
Riding on improving commodity prices, stronger production outlook and healthier cash flows, the Big Oil firms look poised to continue the momentum in the coming years.

2017 turned out to be a banner year for the Big Oil companies as they benefited from their scale and diversification, resulting in the strongest returns on capital in the industry.

More importantly, the companies were able to cover their investment and payouts with cash from operations -- something investors really want right now. In fact, riding on improving commodity prices, stronger production outlook and healthier cash flows, the companies look poised to continue the momentum in the coming years.

Recovering Crude and Leaner Strategies Pay Off

With the crude markets having recovered from the historic lows and comfortably trading above $60 a barrel since a month, the impact of improving energy landscape is clearly visible on the oil majors. The uptrend is attributed to tightening supplies, rising demand and OPEC-deal extension talks.

The companies have also reaped benefits of cost-containment strategies adopted during the historic downturn period. They focused on realigning their business models to a more leaner and efficient structure so as to stay competitive in the long run. They have engaged in reducing headcount, streamlining operations, divesting non-core projects, slashing dividends, capex and operating costs to adapt to the weak pricing environment and bolster their financials.

Big Oil firms Put on a Stellar Show

With the full-year 2017 results out, one can be positive that the super majors have successfully come out of the slump period on the back of rebounding prices and cost-cut efforts. The major oil firms, ExxonMobil Corp. XOM, Chevron Corp. CVX, BP plc BP, Royal Dutch Shell plc RDS.A and TOTAL S.A. TOT, collectively known as ‘Big Oil,’ have recorded massive year-over-year growth in their top and bottom line.

ExxonMobil reported earnings of $19.7 billion in 2017, up 151.4% from 2016. Chevron posted earnings of $9.2 billion in 2017, reflecting a whopping surge from the net loss of $497 million in 2016. For the British giant BP, 2017 was one of its strongest years of late.

The company’s earnings skyrocketed 138.5% year over year to stand at $6.6 billion in 2017. Anglo-Dutch supermajor Shell reported earnings of around $15.8 billion in 2017 — a whopping 119% surge compared with 2016. France’s TOTAL reported net income was $8.6 billion, up 39% from 2016 level.

Strong Results Leading to Dividend Hikes and Buybacks

Cash flow from operating activities, which is a key metric to gauge the financial health of the firms — the oil majors, was the highest in 2017 since the downturn period. The companies generated enough cash to pay off debt along with funding capex and dividend payments.

Chevron reported $20.5 billion in cash flow from operations in 2017, up from $12.8 billion in 2016. ExxonMobil generated $33.2 billion in cash flow compared to $26.4 billion recorded in the year-ago period. Shell generated cash flow from operations of $35.6 billion, up 73% from the $20.6 billion recorded in 2016.

BP generated operating cash flow of $24.1 billion in 2017 as against $17.6 billion reported in 2016. TOTAL witnessed a 35% year-over-year increase in cash flow from operations, which stood at $22.3 billion in 2017. 

Massive growth in the income and cash flows has encouraged supermajors to raise dividend payouts and resort to share buyback programs.

In this regard, TOTAL has decided to lift its dividend by 10% over the next three years, while planning to repurchase about $5 billion in shares.Chevron is also in line for a 31st consecutive annualized dividend hike in 2018. Shell is set to repurchase $25 billion of shares by 2020. As a sign of resurgence in the industry, BP has also abolished its scrip dividend and resumed share repurchase programs. ExxonMobil has also maintained its 34-year record of hiking dividends.

In fact, rebounding oil prices and strategic initiatives have helped not just the biggies but most of the energy firms including Statoil ASA, Cabot Oil & Gas Corporation and Marathon Petroleum Corporation among many others to not just boost their profits but raise their dividend payouts as well.

A Promising 2018

Unlike other short-lived rallies over the past three years, we believe that the current higher oil prices are a result of improving fundamentals. Declining inventories, bright demand outlook and the extension of OPEC-led supply cuts until the end of 2018 are the major factors helping to balance the market, and support the strong uptrend.

As such, the energy stocks look poised for further growth and greater investor rewards. The companies are set for more cash generation and the top priorities of the CEO’s are shifting from cost-containment efforts to boosting of shareholder value.

Chevron remains poised for production growth on the back of solid execution of its major high-margin capital projects, with Australian LNG projectsbeing the key driver,along various other projects includingStampede, Hebron and Big Foot. Being most strategically positioned among the integrated players, the company is hugely set to benefit from recovering markets and operational effiency. It is likely to maintain its impressive dividend record and will grow its dividend yield every year through the end of the decade. 

BP has made investments in Africa and brought seven key projects online in 2017, including Khazzan Phase 1, Zohr, Juniper, Persephone, Quad 204, Trinidad Onshore Compression and West Nile Delta - Taurus / Libra, which promises an upbeat outlook for the company with significant cash gains.

Shell’s $50 billion buyout of BG Group has boosted its strong and diversified portfolio of global energy businesses that offers attractive long-term growth opportunities. Importantly, Shell tops the charts in generating organic cash flows. Notably in 2017, the company generated an impressive $27.6 billion in free cash flows, the most by any supermajor.The group’s strong inventory of development projects should help it to maintain the trend in the coming years.

TOTAL’s strategic acquisitions of 2017 including Maersk Oil for $7.5 billion and Engie’s LNG business for $1.5 billion is expected to strengthen its exploration portfolio. Concentrating on the optimization of its capital projects, strong execution and efficiency, the company is set for stronger cash flows and investor rewards. The company currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

While the prospects of these supermajors sound promising, ExxonMobil will likely be a laggard. Though it is one of the best-run companies among the global oil majors, consistently producing industry-leading financial returns, the company's major problem is its long-running inability to consistently increase output. ExxonMobil is suffering from marginal or falling returns, reflecting its struggle to replace reserves, as access to new energy resources becomes more difficult.

Given the large base, achieving growth in oil and natural gas production is anyway a challenge for the company over the last many years. During 2017, ExxonMobil’s oil-equivalent production fell by around 3% from 2016. Moreover, with natural gas prices trading under $3 per MMBtu and ExxonMobil being the second largest producer in the United States, the company's earnings and revenues will continue to feel the heat.

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