Putting cash to work
During end-of-year earnings calls, as is almost always the case, financial matters dominated the conversation with analysts. Cash flow, capital spending guidance and shareholder distributions garnered the most attention.
Knowing oil prices were higher, analysts were looking for specific guidance as to how much cash flow would be expected to improve and whether cash would be directed toward shareholders, the core businesses or expanding alternative energy businesses. Flexibility was a common theme, with analysts wanting to know if and how capital spending plans might be geared up in the second half of the year if oil prices were to stabilize at current levels or improve.
Analysts highlighted shareholder distributions by reminding companies the market tends to reward companies that provide stable dividends, even when oil prices are low. Analysts asked direct questions about the level at which crude oil prices need to stabilize before companies can start to raise shareholder pay-outs. They also asked if capital return will take the form of share buybacks or dividends.
Striking a balance between core and alternative
Analyst interest in the balance between core and alternative businesses was notable. Companies were asked more than once whether incremental capital spending would be allocated to the upstream business to capitalize on the potential uplift in oil prices or the renewables business.
While analysts acknowledged companies’ aspirations, they tried hard to evaluate the companies’ competitiveness through both financial and strategic lenses. Analysts questioned the feasibility of renewable business plans laid down by the companies asking about core capabilities and comparing returns on their upstream assets with potential returns from their renewable projects.
Analysts posed several questions to companies on their current and targeted gearing levels. The trade-off between keeping debt levels low and preserving credit ratings versus growing non-oil businesses that operate with lower returns and therefore need higher leverage was evident. Recent announcements from credit rating agencies on potential downgrades were clearly on analysts’ minds.
On the strategic front, the commitment of oil majors to low-carbon businesses was a key focus area. Several questions were raised about how far into the future companies expect the renewable business to become material.
US playing catch-up
US companies, lagging in their ambitions relative to peers, were asked how the intense external pressure (from peers, shareholders, credit agencies and others) to reduce their carbon footprints might be influencing board discussions. Analysts probed if US companies have any long-term plans to operate as diversified energy companies, such as their European peers.
Companies continued to high-grade their portfolios by divesting less-strategic assets and focusing investment on projects with higher margins. Questions were sure to ensue. Shifting capital priorities and the optimum size of their upstream business in the long term were a focal point.