Can Oil Majors Generate Enough Cash?

Includes: BP, CVX, RDS.A, XOM
by: Christoph Aublinger

In 2013 no oil major had sufficient operational cash flow to cover capex and dividends.

In 2014 many were forced to cut capital expenditure.

Because of assets sales and inefficient exploration, hydrocarbon production is falling for the majors.

Investing in the oil majors might not be as lucrative in the long term as many think.


Within the last months, I have calculated production costs for oil companies in 2013 all over the world and I have summarized my results in an article. In that research I only considered the income statement and eliminated all factors that are not directly related to hydrocarbon production.

Nevertheless, the cash flow statement offers another clue for the performance of oil companies. Without getting more cash from operations than spending for capital expenditure and dividend payments no enterprise can be called sustainable. Additional pressure on oil companies is put through the recent fall in the oil price. In this article I investigate cash flow, capital expenditure and dividend payments over the last five years for the world's 4 most important oil majors: ExxonMobil (NYSE:XOM), Shell (NYSE:RDS.A), BP (NYSE:BP) and Chevron (NYSE:CVX).


All numbers in $billions. Source: annual reports.

ExxonMobil is the world's biggest public oil producer (1,449 mmboe in 2014). It earned nearly 80% of its profits in 2014 in the upstream business. Its other segments are downstream and chemical products. While the company's operational cash flow tended to decline over the last years, the opposite is true for both capex and dividend. In 2013 cash flow after investments and dividends was negative the first time. One has to consider, that in this year average Brent price was $108.56 and average WTI price was $97.98. Capex rose slightly in 2014, and cash flow remained negative.


All numbers in $billions. Source: annual reports.

The UK-based BP produced 1167 mmboe in 2014 including its stake in Rosneft. Its cash flow situation is the worst of the 4 majors. After capex and dividends cash flow was negative for the years 2010 till 2014. Only after a massive cut in capex for 2014 cash flow after capex and dividend became positive.


All numbers in $billions. Source: annual reports.

The second European major, Shell, did not cut its dividends since the end of World War II. In 2014 it produced 1,124 mmboe, earning more than 70% from its upstream division. Shell saw rising operating cash flow between 2010 and 2013, but the company's capex rose even stronger, leading to a huge negative cash flow after capex and dividend in 2013. Only after a slash in capex this value became positive one year later.

All numbers in $billions. Source: annual reports.

Chevron is the second biggest US upstream company with a total production of 938 mmboe in 2014. As for the other majors, the company saw rising capex while at the same time operating cash flow went down. Although Chevron cut its capital expenditure significantly for 2014, it raised its dividend and this, in combination with a lower operating cash flow led to a negative cash flow after capex and dividend in 2014.

Did Oil Production Rise?

So, cash flow after capex and dividends became more and more negative over the last years. May it be that management decided to invest more money than it earned in order to boost production volumes? The following chart gives an answer:

Despite the gigantic investments in the last five years every single one of the four oil majors saw a significant decrease in production volumes during that period. Shell and Chevron did best with only losing slightly above 5%, while ExxonMobil lost roughly 10% and BP more than 15%. This value for the British company fits well with the huge sales of assets over the last five years and might also be affected by the disaster in the Gulf of Mexico in 2010. Only two companies were able to slightly increase production on a year-to-year basis for one period (ExxonMobil from 2010 to 2011 and Shell from 2011 to 2012).

Summary and Conclusions

Within the last years a pattern of rising capital expenditures and falling operational cash flow emerged, that led to negative cash flow after capex and dividend for the 4 biggest majors in 2013, a year with average oil prices above $100. Additionally, production went down for all of them in the same period. Some of the majors responded in 2014 by cutting their capex significantly. Despite the 50% drop in the oil price during the second half of the year, most of them succeeded. What effect the cut in investments will have on future production is unclear, but most likely the decrease in hydrocarbon production will be accelerated.

When not even the world's biggest oil majors are able to maintain long term sustainability in 2013's and 2014's price environment, how should this be possible for smaller companies? Naturally there might be some exceptions as companies that found an especially sweet spot are way better off in terms of cash flow than the majors. But generally the majors can be seen as proxy for the hydrocarbon industry, although they might be more efficient, but less flexible. Additionally, the have other business divisions like downstream that produce a more constant cash flow.

There are a number of different solutions for that dilemma: (1) cost discipline, (2) company downsizing, (3) significant rises in the oil price or (4) a significant change in legal regimes all over the world that gives access to new and inexpensive resources.

(1) and (2) are mostly within the action ability of the companies. The first is an easy way to go for many oil companies. In the boom years many operations may have put on unnecessary fat, and streamlining might save billions of Dollar. But these measures can only lead to a certain amount of savings. Eventually, all potential savings are exhausted and maintaining of the dividend is only possible by asset selling, practically a downsizing of the companies. This is was what we have seen within the last years, although balance sums have generally risen. It is clear, that this game can't be played forever. Believing that a company with a decreasing asset and profit base can increase its dividend, is voodoo economics.

As I have pointed out in my article about production costs, I believe that the present oil price is way too low to cover production costs and earn decent profits and I am sure that it will rise significantly within this or next years. But the majors were not able to pay their capital expenditures and dividends with their operational cash flow at a price level of $100. As oil producers will go for the easiest oil resources first and therefore production costs tend to rise, there is no reason to assume that, even, if the oil prices jumps to $100 tomorrow, the majors would have a positive cash flow after capex and dividends.

The fourth and last point I mentioned above, is also the most unrealistic. The trend within the last decades was a firmer grip of countries on their hydrocarbon resources and there is no reason why it should change in the near future. Apart from that, most of the world's geology was already explored and new discoveries are most likely either small or in difficult and expensive production areas.

Basically, it all boils down to one sentence: Investing in the majors might not be as lucrative on the long term as many investors think.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.