Financial performance – publicly traded companies

Billion dollars (2018)

40

30

20

10

Change in equity

Asset sales

Change in debt Free cash flow

The oil and gas business has traditionally generated a substantial economic surplus for resource owners and producers, characterised by economies of scale and barriers to entry that have tended to favour large companies with strong balance sheets. After covering expenses and salaries, income from oil and gas is primarily used to fund investments, provide financial returns and meet tax obligations. For investors and governments (in both producer and consumer economies), the industry has served as an important source of financial value.

However, publicly traded companies are facing growing pressure to optimise decision making across multiple priorities, including environmental and climate-related areas, which has implications for future business strategies and financial performance ahead.

Most upstream oil and gas investments are financed on balance sheets with equity from corporate retained earnings. Debt accounts for only around a quarter of the capital structure among top producers, and has been used sparingly in order to smooth investment and dividend payments during downturns, most recently in 2015-16. While project finance structures play a meaningful role in funding infrastructure, they are mainly relevant on the upstream side in large integrated projects such as LNG.

Over the past three years, the Majors have significantly improved their financial performance through a combination of cost reductions and operational efficiency, higher production, capital discipline and a higher oil price. Annual free cash flow reached almost USD 90 billion in 2018 and is on course to remain positive, albeit at stable levels, in 2019. This performance has enabled the Majors to pay down debt after a period of leveraging.

An important pillar of financial performance has been the maintenance of high dividend yields, at nearly double the market average. During the oil price downturn, Majors were willing to enact challenging internal measures and borrow heavily to avoid cutting dividends. Share buybacks are another channel to deliver value to investors. Outside of 2015-16, the industry has returned capital to equity markets and this practice has provided comfort to investors, even as calls for divestment have increased from some quarters.

However, overall equity performance for the Majors has recently suffered and has trailed the broader market during the past five years. This partly reflects investor uncertainty over how well the industry can position itself in a changing market environment.

Smaller, independent players, e.g. US shale companies, also improved since 2016, but financial performance remains more tenuous.

Independents have relied more on issuing new debt, selling assets or issuing new equity, though their call on external financing has fallen since 2016, thanks to operational efficiency, cost reductions, and a more disciplined approach to balancing the investment and cash flow generated by their own activities. While shale companies in aggregate overspent also in 2018, the ratio of capital expenditures to cash flow has constantly declined from almost 2 to 1 in 2015 to just over 1 to 1 in

2018. Furthermore, shale companies have paid back debt and begun to return cash to their shareholders via share repurchases.

Still, US shale companies have yet to turn the corner in terms of profitability. Despite a continuous strong increase in US shale oil production, capital markets have grown more wary of financing independents, as evidenced by rising bond yield spreads in 2019.