Zhitong Finance APP learned that with the decline in crude oil prices and refining margins, four of the top five super oil companies may need to borrow to fund the recent $15 billion share buyback in the last quarter, which has raised concerns in the market about the long-term sustainability of dividends for these companies. Analysts expect the performance of Exxon Mobil (XOM.US), Chevron (CVX.US), Shell (SHEL.US), Total (TTE.US), and BP plc (BP.US) to decline by 12% compared to the previous quarter, totaling $24.4 billion. Except for Shell, these companies' free cash flow is forecasted to drop by 30% compared to a year earlier, making it impossible for them to pay dividends and buy back stocks with free cash flow.

Figure 1

Share buybacks have always been at the core of oil giants' strategies, as the post-epidemic rise in commodity prices has brought record profits, providing an opportunity to attract investors. However, with reduced cash flows, these shareholder return commitments are now under pressure.

Despite the escalation of tensions in the Middle East, crude oil prices have fallen by about 17% from this year's high point, and third-quarter profits will be only half of the historical high point in 2022, also the lowest level since 2021.

Noah Barrett, Chief Energy Research Analyst at Janus Henderson, stated that if oil companies want to maintain their current buyback pace, they may have to rely on their balance sheets.

According to Bloomberg data, Exxon Mobil and Chevron have a debt ratio of less than 15%, well below the 20% to 25% mid-term target range, providing them with the room to borrow money to fund buybacks.

However, the debt levels of major European oil companies are high, with little room for maneuvering, particularly for BP plc, whose net debt levels are still rising and has performed the worst this year, dropping by 13%.

Figure 2

In fact, in the oil industry, borrowing to buy back stocks is not uncommon. When stock valuations are low, borrowing can enhance stock returns. However, the dim outlook for oil prices next year implies that cash shortages may persist for a long time.

OPEC has recently lowered its global oil demand forecast for the third consecutive month. Nevertheless, OPEC still plans to increase oil supply by 2.2 million barrels per day starting from December.

Meanwhile, non-OPEC countries have shown strong growth in oil production, especially in the Americas. It is expected that the United States, Guyana, Canada, and Brazil will increase their oil production by nearly 1 million barrels per day by 2025.

Refining operations typically help maintain profitability stability when oil prices decline, but they are currently under pressure. Exxon Mobil, TotalEnergies, BP, and Shell have all warned that the profit margins of their global fuel manufacturing sectors will decrease in the third quarter as fossil fuel demand weakens and supply increases.

Analysts at Bank of America wrote in a report this month that with profit margins steadily declining since reaching historic highs in 2022, the 'platinum age' of the refining industry is coming to an end.

See Figure 3

According to Bank of America, global refining capacity will increase by 730,000 barrels per day in 2025 and by 660,000 barrels per day in 2026. This growth is mainly due to the expansion of refining capacity in Mexico, the Middle East, and China, which will offset the impacts of refinery closures in the United States and Europe.

Investors will focus on whether Exxon Mobil can maintain strong production growth in Guyana and the US Permian Basin, as well as the latest developments in Chevron's Tengiz project in Kazakhstan and its natural gas business in Israel.

HSBC's Kim Fustier stated that investors will also pay attention to the continued normalization of trading income, which could pose a significant hurdle for BP plc and Shell, as these two companies have historically earned huge profits from this business.

BP plc will kick off the oil giants' earnings season on October 29.