MAJORS DEBT'S RECORD
NASDAQ wrote, some of the world's largest energy companies are saddled with their highest debt levels ever as they struggle with low crude prices, raising worries about their ability to pay dividends and find new barrels.
Exxon Mobil Corp.Royal Dutch Shell PLC, BP PLC and Chevron Corp. hold a combined net debt of $184 billion -- more than double their debt levels in 2014, when oil prices began a steep descent that eventually bottomed out at $27 a barrel earlier this year. Crude prices have rebounded since, but still hover near $50 a barrel.
Executives at BP, Shell, Exxon and Chevron have assured investors that they will generate enough cash in 2017 to pay for new investments and dividends, but some shareholders are skeptical. In the first half of 2015, the companies fell short of that goal by $40 billion, according to a Wall Street Journal analysis of their numbers.
"Eventually something will give," said Michael Hulme, manager of the $550 millionCarmignac Commodities Fund, which holds stakes in Shell and Exxon. "These companies won't be able to maintain the current dividends at $50 to $60 oil -- it's unsustainable."
BP has said it expects to be able to pay for its operations, make new investments and meet its dividend at an oil price of between $50 and $55 a barrel next year.
The debt is piling up despite cuts of billions of dollars on new projects and current operations. Repaying the loans could weigh the companies down for years, crimping their ability to make investments elsewhere and keep pumping ever more oil and gas.
"They are just not spending enough to boost production," said Jonathan Waghorn, co-portfolio manager in London at Guinness Atkinson Asset Management Inc. who helps oversee more than $400 million across a range of energy funds, including shares in Exxon, BP, Chevron and Shell.
The oil companies say they have many tools to deploy to help defray debt, including selling assets and offering shareholders more shares instead of a cash dividend, as well as continuing to cut costs. Record-low interest rates are helping ease some of the pain.
They also say the steep levels of debt are temporary as the companies restructure, and the debt will fall when oil prices rise.
"We are in a transitional stage in 2016," said Shell Chief Executive Ben van Beurden during last month's earnings disclosures. The company reported a rise in net debt to over $75 billion at the end of the second quarter, in large part because of its acquisition of BG Group PLC.
But analysts and investors say the oil slump is making it harder than ever for companies to raise money with asset sales to pay off debt. Handing out more shares to shareholders is only storing up the dividend problem for the future when the companies will need to pay up. Even the boost many companies got from bumper profits from their refining divisions -- which tend to do well when prices are low -- looks to be coming to an end as a glut of gasoline erodes fuel prices, say investors and analysts.
"The question is, can they get through this year and next without doing something radical like cutting dividends?" said Iain Reid, senior oil analyst at Macquarie Capital.
The rise in net debt has helped push these companies' "gearing" -- a key measure of financial risk -- uncomfortably high. Gearing measures the proportion of a company's net debt to its equity and influences the ratings given by credit agencies.
S&P has already downgraded Shell, Chevron, Exxon and BP, though they all remain highly rated.
Shell's gearing is at 28% and Chief Financial Officer Simon Henry said last month it could even reach its targeted maximum of 30%. BP's gearing is over 25%, while Chevron's is 20% and Exxon's is around 18%.
By comparison, in 2012, Shell's gearing was around 10%, and Exxon's was 1.2%. Back in 2005, when oil prices were climbing steadily, Exxon had no debt, and its profits were so high that its executives and those from other big oil companies were called to testify in front of the U.S. Senate about their so-called windfall profits.
Chevron's Chief Financial Officer Patricia Yarrington said in April that the company's higher levels of debt were expected. "We could handle that if it's temporary," she said.
Exxon Chief Executive Rex Tillerson has assured investors that Exxon remains committed to paying its dividend.
The company has increased shareholder payments for 34 straight years. Mr. Tillerson and others have noted that Exxon has the ability to borrow further. If anything, the company has signaled a willingness to go further into debt for strategic opportunities, such as buying assets, including InterOil Corp., a small company focused on gas exports in Papua New Guinea that Exxon agreed to acquire for an estimated $2.5 billion in July.
"We're not going to forgo attractive opportunities," said Jeff Woodbury, Exxon's vice president of investor relations, on an investor call last month.
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