As crude trades well below $50 a barrel, Exxon Mobil Corp., Royal Dutch Shell Plc and other oil giants have seen their debt double to a combined $138 billion, spurring concerns they will need to keep slashing capital spending and that dividend cuts may eventually be necessary.
Worse, the mountain of debt, which has grown tenfold since 2008, is likely to increase further in the third and fourth quarters, executives and analysts say, Bloomberg reported.
“On the debt, it may go up before it comes back down,” Shell chief financial officer Simon Henry told investors last week. “And the major factor is the oil price.”
The main concern is that companies have so far failed to stop the increase in debt load, said Harold “Skip” York, vice president of integrated energy at consulting firm Wood Mackenzie Ltd. in Houston.
“The debt traffic light is yellow,” he said. “In the absence of an oil price uptick or sizable asset sales, commitments to maintain the dividend will face even more pressure.”
The problem for Big Oil is simple: Companies are spending a lot more than they are earning. Both West Texas Intermediate and Brent crude, the two most prominent benchmark grades, slid into bear markets this week after falling more than 20% since early June.
The first-half results indicate that oil companies “are likely to generate large negative free cash flows for the full year,” said Dmitry Marinchenko, an associate director at Fitch Ratings in London.
Take Chevron Corp. In the first half of the year, it generated $3.7 billion pumping crude, refining it and selling gasoline and other products. But that was not enough to cover the $4 billion it paid to shareholders over the same period, let alone the $10 billion it invested in projects. Although Chevron tried to close the gap by selling $1.4 billion worth of assets, it still had to take on $6.5 billion in new debt over six months.
The imbalance explains why the debt load has grown so quickly over the last decade. Before oil prices plunged in mid-2014, Big Oil had around $71 billion in net debt, up from a low of just $13 billion in mid-2008, when oil prices hit a record high of nearly $150.
Debt levels are currently rising at an annual rate of 11.5%, more than double the 5.1% witnessed between 2009 and 2014, said Virendra Chauhan, an oil analyst at consulting firm Energy Aspects Ltd. in Singapore.
