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.”
Reuters, meanwhile, leads its exposé with the example of National Oilwell Varco Inc., an oilfield service company that has lost two-thirds of its value and cost shareholders $9 billion since 2017, but still rewarded its CEO with stock worth $3.3 million in late February. The reason: “his company’s total shareholder return over the three years ending in 2019 was not as bad as most of his beleaguered peers.”
The example proves a more general rule, Reuters says. “U.S. energy executives have retained such lavish payouts even as they have struggled for years to deliver shareholder returns—despite massive growth in domestic shale oil production,” the news agency explains. That’s because fossil companies, “more than any other sector, measure performance only against other companies in the same industry, who tend to suffer at similar times. They use a metric called relative total shareholder return (TSR) and benchmark it against a pre-determined group of peer companies—making it possible for executives to get big payouts even if their companies’ stocks lose value.”
Which means that “the heavy shareholder losses expected this year will likely not translate to big reductions in CEO stock awards because the pandemic hit all oil companies in roughly equal measure,” Reuters continues. “With relative TSR as a key component of pay packages, energy company CEOs have been winning for losing for at least a decade. Investors, meanwhile, have just been losing. The total return of the S&P 500 Energy Index .SPNY is 1% over the past decade, as of May 26, a period when the broader S&P 500’s total return rose by 243%.”