May 28, 2020 Read More →

Fossil fuel majors paying money out faster than they’re earning it

The Energy Mix:

Four of the world’s five biggest fossils are paying money out to their shareholders faster than they’re taking it in, and a good number of U.S. fossil executives can expect lavish payouts while their companies crash around their ears, according to separate analyses this week by the Institute for Energy Economics and Financial Analysis (IEEFA) and the Reuters news agency.

The first of the two releases found that Shell, Chevron, ExxonMobil, Total SA, and BP “spent more cash on dividends and share buybacks during the first quarter of the year than they generated from their core business operations,” IEEFA reports. “The analysis found that the five oil and gas supermajors collectively paid out US$18.5 billion in dividends and buybacks during the quarter, while generating only $8.6 billion in free cash flows. The companies covered the $9.9 billion shortfall with other sources of cash, including borrowing, asset sales, and drawdowns of cash reserves.” 

Usually, “investors expect private companies to fund payments to shareholders out of free cash flow—the cash generated by the company’s operations, minus cash spent on capital projects,” said IEEFA energy finance analyst Clark Williams-Derry. “When a company deviates from this standard, investors raise questions about the firm’s business model, applying extra scrutiny to its financial underpinnings.”

Yet the problem isn’t new. All told, IEEFA says the five companies generated free cash flow totalling $340 billion between 2010 and 2019, but paid out $556 billion in dividends and buybacks.

“Today’s global oil and gas market—characterized by faltering demand, low prices, and rising volatility—will further weaken the industry’s prospects for generating the reliable, robust cash flows that attract investors,” said IEEFA Director of finance Tom Sanzillo.

“In this environment, oil and gas majors now face a troubling choice,” added study co-author Kathy Hipple. “They can cut dividends to avoid taking on new debt, or they can borrow money to sustain short-term shareholder distributions, while potentially weakening their long-term finances.”

[Staff Report]

More: Fossil Shareholders, Executives Gain While Companies Falter, New Analyses Show

Posted in: IEEFA In the News

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