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Timid oil giants hand back their cash

The Sunday Times

August 23, 2009

Danny Fortson

The world’s top six oil companies have showered investors with $130 billion (£79 billion) in dividends and share buybacks over the past year and a half, according to new research.

The payouts have coincided with a global buying spree by government-controlled rivals from China, India and the Middle East, prompting some to wonder if the companies that once dominated the world oil industry have given in to the increasingly powerful state-backed groups.

Exxon, BP, Shell, Conoco Phillips, Total and Chevron have in the past 18 months, according to figures compiled by the investment bank Jefferies Broadview, spent $75 billion on share buybacks, which are designed to prop up share prices by reducing the amount traded in the market. That comes on top of $54 billion paid out in dividends over the same period.

To put that $130 billion into perspective, the combined market value of Britain’s 80 publicly-listed oil explorers and producers (excluding Shell and BP) is $112 billion. The scale of the payouts led one analyst to accuse energy bosses of a “complete failure of ambition”.

In the past few months national oil companies have bought some of the world’s most sought-after assets. Sinopec of China paid $5 billion for Addax Petroleum, a group with wells in Nigeria and Iraq. ONGC of India is expected to bid for YPF, Repsol’s Argentina business. Sinochem, another Chinese group, agreed to pay £532m for Emerald Energy, which has fields in Syria and Colombia.

While the national oil companies have been planting their flags from West Africa to South America, the quoted oil companies are preoccupied with keeping investors happy. Exxon alone has spent $48 billion on buybacks.

Companies are spending the rest of their money on efforts to bring huge new projects like deep-sea platforms and oil sands to fruition.

BP, for example, will spend about $21 billion this year, but it is a losing battle. Richard Griffith of Evolution Securities said: “BP produces about 4m barrels a day and loses about 5% of production each year. That’s three Tullow Oils it has to find ever year, and that’s just to stand still.” Tullow is Britain’s largest independent oil group, worth £8.6 billion.

The oil giants are still the most profitable companies on the planet. But in some important ways they are a shadow of what they once were. In 1970 the top oil groups, known as the “seven sisters”, controlled 85% of the world’s reserves.

Nearly four decades of nationalisations, increasing taxes and surging confidence from governments in oil-rich countries has left them fighting for scraps.

Today they control 15% of the world’s reserves (see charts above). And they have to operate under much more onerous terms — a 90% tax rate, like that of Russia, is not uncommon.

Shut out from the remaining “easy oil” provinces, the oil giants are being forced into increasingly exotic areas, geographical and technological, to find new oil, and are being ground down by the costs. To pump oil from below the dunes of southern Iraq can cost as little as $2 a barrel. Getting it from under the seabed can cost $45 a barrel.

The national oil companies, backed by governments with the goal of grabbing as much of a dwindling resource as they can, are ratcheting up the pressure. In many cases they are willing to pay far more than publicly quoted rivals that have to explain the merits of such deals to their investors. Paul Wheeler, an oil banker at Jefferies Broadview, said: “National oil companies and the oil giants have the same objective, which is to secure new reserves, but they labour under very different conditions.”

There is another problem, say critics. The oil giants have become prisoners of their dividend payments. The share prices of these companies have been stagnating. BP trades today at almost exactly the level it did five years ago.

For investors such as pension funds, the only reason to hold the shares is the generous dividend payments. Without the dividend they are an unappealing proposition: low-growth companies that have no control over the price of their only product.

The dividend is thus sacrosanct and bosses will go to extraordinary lengths to maintain it. They will sooner cut spending even though it throws their longer-term prospects into doubt.

Sunday Times Article

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