Last year's recovery has eased the financial pressure on major producers, who suffered one of their worst annual performances in decades during the pandemic. When two of the energy sector's super majors report first-quarter earnings on Friday, April 30, ahead of the opening, investors will focus on generating cash, which is necessary to balance their books.
The latest trend in the oil markets suggests that energy supplies have passed the worst of the pandemic crisis as oil demand slowly increases, fueled by both OPEC + production cuts and the reopening of countries following the close of COVID-19.
Still, the improved equation between supply and demand does not mean that the largest US oil producers – ExxonMobil (NYSE 🙂 and Chevron (NYSE: NYSE 🙂 – are not available. of the woods. The pandemic has burdened their balance sheets with debt as they borrowed money to cope with the 2020 oil market crash and finance their dividends.
At its January announcement, Exxon reported its first annual loss in at least three decades, with an impairment loss of $ 19 billion, with cash flows negative to $ 20 billion after dividend payments were included.
Chevron, on the other hand, than Exxon, as the California-based energy giant, has avoided major expansion plans for the past five years because it has instead focused on spending control. In 2020, Chevron paid out more cash on dividends ($ 9.7 billion) than on investments ($ 8.9 billion). That hasn't happened for Chevron in at least 30 years.
With the combination of higher oil prices, tight expenditures and asset sales, the two largest North American producers are expected to show higher sales compared to the previous quarter. Exxon is likely to report an 18% revenue increase for the quarter ended March 31 to $ 55.18 billion, while Chevron should show a 26% revenue increase, according to analyst consensus forecasts.
Improve Cash Flow
Despite these improving fundamentals, some analysts believe these giants are unable to return more money to their shareholders. Texas-based Exxon has said it will keep its $ 15 billion annual dividend while paying off its debt if oil and gas prices remain at current levels. JPMorgan sees Exxon's free cash flow picking up again to $ 19.6 billion this year, giving it a significant surplus to cut its borrowings.
ExxonMobil Weekly Pass.
Of the five super majors, Chevron has the best balance and "strong outlook", according to HSBC analyst Gordon Gray. for a share buyback, as stated in a Bloomberg report. The California-based company said in March that it should generate $ 25 billion in free cash on top of its dividend through 2025 if it stays at $ 60.
Goldman Sachs, on the other hand, predicts the biggest jump in oil demand fueled by the global economic recovery amid the rollout of COVID-19 vaccinations.
In a letter to customers on Wednesday it said:
"The magnitude of the coming change in the volume of demand – a change that supply cannot match – should not be underestimated."
Bottom Line
Major oil litigation in the US has seen the worst of the pandemic-induced collapse in demand. Tomorrow's earnings release will likely show that their cash generation is improving and that they are in a better position to pay dividends out of pocket and reduce their debt burden.
