October 31, 2013 / 1:58 PM / 5 years ago

Big Oil faces pressure from shareholders over costs

LONDON/HOUSTON (Reuters) - Oil industry shareholders concerned about poor returns and costly projects urged executives from Big Oil this week to return cash to shareholders - and at least one of the world’s top five petroleum companies fully acquiesced.

The Exxon corporate logo is pictured at a gas station in Arlington, Virginia January 31, 2012. REUTERS/Jason Reed

As they posted third-quarter results, the leading oil companies vowed to control spending and to put cash in the pockets of investors through asset sales, share buybacks or dividends while analysts grumbled about lagging stock prices.

BP Plc (BP.L), the smallest of the group of five, was the most aggressive. It raised its dividend, cut back capital spending plans, and ramped up its asset sales target to $10 billion over the next two years from between $4 billion and $6 billion previously - cash that will also go back to shareholders.

Its shares have risen 6.8 percent since Monday’s close.

“At the moment the market likes oil companies that cut back on expenditure and pay out big dividends,” said Malcolm Graham-Wood, analyst and adviser at VSA Capital.

The other companies - Exxon Mobil Corp (XOM.N), Chevron Corp (CVX.N), Royal Dutch Shell Plc (RDSa.L) and Total SA (TOTF.PA) - acknowledged spending heavily to prevent output from falling but stopped short of major changes.

Exxon indicated its capital expenditures may subside next year after planned spending of $41 billion this year. It said it has returned $5.8 billion to shareholders in the third quarter through dividends and share repurchases, but did not raise its dividend.

The top five have all badly underperformed the global MSCI World index this year, which is up 20.6 percent for the year to date, even with share buybacks already under way.

The weakest performers are Exxon, whose shares have managed just a 2.6 percent rise, and Shell, down 5.8 percent.

Doug Leggate of Bank of America Merrill Lynch said on Exxon’s results call that its “share price has frankly been pretty awful.”

David Rosenthal, Exxon’s vice president of investor relations, responded by saying, “we are executing on the things that we can control.”

Spurred on by historically high oil prices in the past few years, integrated oil companies have increased exploration work in areas once deemed too risky.

France’s Total, which embarked on a so-called high-risk, high-reward exploration strategy to find massive fields in areas such as the southern African seas, conceded last month it would start what CEO Christophe de Margerie called a “soft landing” in capital expenditure.

Total said it would pay a quarterly dividend of 0.59 euro per share, unchanged from the previous quarter.

Asked why the group did not raise its dividend this quarter like BP, Total said: “It’s not because there are expectations that we have to dance to the market’s tune.”


Thomson Reuters data shows there have been pushes for shakeups at 15 different energy companies in the first 10 months of this year - on pace for the industry’s highest number of activist situations in the past decade.

Targeted companies have included Chesapeake Energy Corp (CHK.N), Hess Corp (HES.N) and Transocean Ltd. (RIG.N)

Members of Big Oil have not been hit by the wave of shareholder activism that has struck the energy industry this year, but executives are aware of the pressure.

Shell’s finance director, Simon Henry, warned about the risks of short-term thinking that is gripping the industry - even though Shell is itself buying back $5 billion worth of stock this year and paying out $11 billion in dividends after raising its payout at the end of 2012.

“Those who are cutting capex are being very highly rewarded ... 10-15 years ago the entire industry cut capex, obsessed by returns and with the market egging them on, but cutting investment is one of the reasons we’ve got a $110 oil price,” he told reporters after third-quarter results.

Shell, which also said capex would peak this year, was among the cutters last time around as the industry retrenched 10-15 years ago, sacking engineers and pulling back from investments to an extent that made it hard to respond to an upturn.

The company ended that period with a damaging reserves downgrade in 2004 from which it took years to recover.

“What you’re seeing is more of an olive branch being put forward by names like BP and Total than Shell in recent quarters,” said Nomura analyst Theepan Jothilingam, “but one needs to be careful about being positioned for the long term in terms of the right balance between investing for the future and cash return today.”

Reduced spending by the top companies could be bad news for the service firms that provide rigs and help engineer new projects, although French services group Technip TECF.PA on Thursday brushed aside those concerns.

“I think this discipline will be applied to investments (in the downstream), and that it remains still very positive for investments in exploration and production,” said Chief Executive Thierry Pilenko.

The third-quarter results themselves were a mixed bag, with BP and Total beating analysts’ expectations, Shell missing, and Exxon landing in line. Weak refining margins - well flagged by the industry - reduced profit across the board compared with a year earlier. Chevron’s results are due out on Friday.

Additional reporting by Simon Jessop and Sarah Young in London and by Michel Rose in Paris; editing by Will Waterman and Matthew Lewis

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