Oil Majors' Debt From Crude Collapse May Have Peaked

Surging debt dogged the world’s largest oil companies during the downfall of crude prices. Now, sweeping cost cuts and rising prices have combined to lessen the need to borrow.

Since prices began to sink in 2014, the five “supermajors” more than doubled their combined net debt to $220 billion. But that may be as bad as it gets, Bloomberg reported.

At $50 a barrel, they can balance their books and pay dividends without borrowing for the first time in five years, according to analysts at Jefferies International Ltd. All of the drillers will probably report profit growth in the next two weeks.

As the price of oil declined, producers saved billions of dollars by shedding jobs, renegotiating supplier contracts and canceling projects. BP Plc has said it plans to keep at least 75% of its cuts, and other companies have expressed similar sentiments.

That strategy, combined with oil’s recovery, is allowing the majors to generate cash again, a key focus for investors heading into earnings season.

“As a group they are at peak debt levels now,” said Jason Gammel, a London-based analyst at Jefferies, citing operating and capital efficiency as well as rising oil prices.

In 2014, when oil sold for $100 a barrel, the five supermajors generated a combined $180 billion in cash from operations. Last year, that figure fell to just $83 billion, Jefferies estimates. Cost cuts and higher oil prices will drive that up to $142 billion in 2017 and $176 billion the following year, according to the brokerage.

As the companies report for the fourth quarter, three of them -- Exxon Mobil Corp., Chevron Corp. and BP -- are likely to post the first year-on-year increase in profit since 2014, according to analyst estimates compiled by Bloomberg.

In the case of Shell, debt was also pushed higher by its $54 billion purchase of BG Group Plc. The Anglo-Dutch company, as well as Exxon, BP and Total, suffered credit-rating downgrades as debts spiraled higher.

“We’ve had 2 1/2 years of doom and gloom and we are on the cusp of the upstream oil and gas sector entering a new recovery,” said Tom Ellacott, a senior vice president at consultants Wood Mackenzie Ltd. “We expect the mood music to be a bit more upbeat.”