A study this week by the Wall Street Journal found that the largest publicly traded oil-producing firms “fell short of cash flow for the year.” According to the study, Exxon Mobil (NYSE:XOM), Royal Dutch Shell (NYSE:RDSa), Chevron (NYSE:CVX), and BP (NYSE:BP) showed negative balances when the Journal “deducted the firm’s dividends and capital expenditures from its cash from operations.”
These findings are actually what one would expect and what a long-term investor would prefer from major oil companies considering the downturn in oil prices. The price of oil is low, but these majors are still paying dividends—to appease investors—and investing in capital-intensive projects that will profit in the long run when the fluctuating price of oil trends higher.
For instance, the study explains that, “Exxon spent nearly $7 billion more on developing new projects and dividends in 2016 than it generated in cash.” In other words, even though Exxon’s revenues are down, the company is still preparing for the longer term. Energy businesses make money and succeed with long-term plans for exploration, R&D, and production.
A long-term, fundamentals driven investor would appreciate this behavior by these giants so long as the company itself is financially stable. With relatively easy access to capital, significant assets, and tremendous market advantages, all four of these oil giants seem financially stable in the long run. If they are stable enough to weather a downturn, a long-term investor—one who buys and holds—wants to see such expenditures to ensure the continued generation of revenue in the future.
This study was not only a good sign for the long-term health of these giant public energy companies, but also a good sign for some national oil companies. For example, as Aramco prepares for its expected initial public offering (IPO), its success and positioning will be compared to these energy giants.
While these companies traditionally provide good dividends to their investors, Aramco has been producing enough revenue to pay sums to the government of Saudi Arabia that are significant enough to largely fund the country’s budget ($40 billion a year apparently covers Aramco’s operating costs and capital expenditures, according to Saudi oil minister Khalid al Falih).
Aramco does this while also paying its own operation costs and investing heavily in long-term projects (especially in downstream operations around the globe). Even though Aramco is providing less cash for Saudi Arabia than it used to, its payments to the government are more than the sum of taxes and dividends for each of the four giants.
Long-term investors should appreciate any oil company that can survive today and prepare for the future while making its investors happy. If short-term investors keep the stock prices of these oil giants down, these equities could present bargains as investments with a longer horizon.