European oil and gas majors have increased shareholder distributions based on their improved financial performance in 1H21, including a return to share buybacks, Fitch Ratings says. We expect the companies to maintain flexibility to adjust shareholder payments in line with changes in the pricing environment, leaving leverage forecasts unaffected and helping to sustain their credit profiles.
BP, Eni, TotalEnergies and Shell have posted significantly stronger 1H21 results compared to 1H20, with the combined EBITDA of all four companies doubling yoy. This performance was supported by recovering hydrocarbon prices with the Brent price increasing by over 60% and spot gas prices in Europe and east Asia more than tripling. Extreme weather in Asia and growing Chinese power consumption spurred demand for LNG. European gas prices were supported by limited LNG and pipeline supplies. Profitability in the petrochemicals and marketing segments has also recovered as the global economy bounced back, including growing road traffic and demand for plastic from the automotive industry.
The OPEC+ production policies were among the main drivers of the oil price recovery as the alliance’s production in 1H21 was below its initial plan outlined in April 2020. This, alongside recovering oil consumption as pandemic-related restrictions were eased, accelerated a recovery in prices. We expect the alliance’s production to grow by 0.4 million barrels per day (mmb/d) each month from August, which should be in line with consumption increases for the rest of 2021 and in 2022, therefore avoiding further significant price increases.
Additional oil exports of about 1.5 mmb/d from Iran may disrupt the market in the short term if the incoming Iranian president revives the nuclear deal with the US, thus lifting sanctions on Iranian oil production. However, we expect OPEC+ to slow production increases in response, helping to balance the market.
The oil majors are using increased cash flow to boost shareholder distributions. Shell raised its 2Q21 dividend by 38% qoq, although this is still about a half of its pre-pandemic levels. The company also announced a USD2 billion share buyback for 2021. Eni’s dividend for 2Q21 has reached its pre-pandemic levels, and the company is implementing a EUR400 million buyback programme. TotalEnergies has also announced it is allocating up to 40% of the additional cash flows generated above USD60 per barrel to share buybacks. BP increased its dividend by 4% and launched a USD1.4 billion buyback from its 1H21 surplus cash flow.
We expect all four companies to maintain their flexibility to adjust shareholder returns, depending on prices and the macroeconomic environment. Furthermore, we expect the majors to continue applying some of their free cash flows to reduce net debt. Therefore, the announced shareholder distributions do not alter our leverage forecasts for the companies.
ESG considerations are becoming increasingly prominent in the European oil majors’ reporting, and we expect such disclosure to continue improving as stakeholder scrutiny of the sector intensifies. For instance, TotalEnergies has started reporting its quarterly Scope 1+2 and Scope 3 greenhouse gas emissions.
Source: Fitch Ratings