Despite major cost reduction measures, Q1 2015 earnings for supermajors are expected to be the weakest in recent memory. Operational and financial indicators for FY 2014, however, reveal that recent performance amongst the big 5 has been far from homogeneous.
In short, the Americans outperformed the Europeans. Exxon and Chevron posted high net margins of 8.3% and 9.1%, respectively. Shell’s was a more modest 3.5%, whilst BP (1.1%) and Total (2.0%) struggled badly. Chevron and Total were the most aggressive risk takers, as their CAPEX-to-Sales ratios for the year stood at 19% and 14%, respectively, while the other majors conservatively avoided spending more than 10% of sales.
Among other factors, refining interests are a key driver of this disparate performance. While Exxon, Chevron and Shell refined broadly as many barrels as they extracted in 2014 (113%, 105% and 94%, respectively), BP and Total were much more exposed to upstream (55%, 83%) and have not benefitted from the traditional buffer effect of downstream activities in a low price environment.
Looking at the long-term indicators, not much change can be seen in the 2014 Proved Reserves-to-Production ratio – XOM 6.4, CVX 4.3, RDS 4.2, BP 5.6, TTA 5.4 (expressed in years). In an oversupplied market, the challenge is not to bring volumes, but value. In this respect, the Europeans looked to offset poor performance by building strong net cash positions – between $20-30 billion at year-end 2014 – to maintain dividends and shareholder confidence. However, while Exxon, Chevron and Shell managed to keep their Gross Debt-to-Equity ratio at around 20%, BP and Total ended the year with a degraded financial structure, at 47% and 62%, respectively.
Considering the above, Shell seems to be the healthiest among the European majors, but crucially lacking in long-term organic growth opportunities. In this light, the £47bn takeover of BG Group makes sense: it will boost Shell’s production by 20% and reserves by 25%, and also provides exposure to high-potential Brazilian assets. With similarly modest leverage and potential for quick cash generation, Exxon and Chevron are well positioned for their own M&A moves now the starting gun has sounded.
Antoine Paillat, Douglas-Westwood London
+44 207 397 3348 or Antoine.Paillat@douglaswestwood.com