CALGARY — A rising chorus of voices is calling for the oil industry to reduce spending on growth and begin rewarding shareholders through things like higher dividends and share buybacks.
Investment researchers, think-tanks and newspaper editorials have recently begun advocating that big petroleum companies return as much capital to shareholders as possible as the transition away from fossil fuels gathers momentum and profits fade.
"Demand forecasts are way too positive," says Paul Sankey, managing director of New York-based Wolfe Research.
"Really the essence of the opportunity for oil is to be dividend stocks to pay out. Not to attempt to grow, but actually to orderly liquidate."
Increasing action on climate change
Speaking at a PwC energy forum in Calgary last week, Sankey said lower than expected oil demand growth and increasing action on climate change will mean alternative energy sources will displace oil in the next 30 years.
His comments echo a recent Financial Times editorial that oil companies are entering their twilight years and should focus on dividends and share buybacks. The newspaper specifically singled out the high-cost, high-carbon Canadian oilsands as having some of the lowest justification for growth.
"The essence of the opportunity for oil is to be dividend stocks to pay out. Not to attempt to grow, but actually to orderly liquidate."
At this year's ExxonMobil annual general meeting, a shareholder resolution called on the company to increase dividend payouts and share buybacks in light of the risks of climate change policy and stranded assets.
The resolution only garnered 4.1 per cent of shareholder support, with Exxon recommending shareholders vote against it because it is already factoring in carbon policies in growth decisions and has steadily increased its dividend.
Sankey said it's hard for companies to accept that they face eventual decline.
"It's very tough for companies such as an Exxon, with a big corporate ego, to really reflect that it's the end of the oil age and they should shrink."
Broken business model
Paul Stevens at the London-based Chatham House think-tank published a report earlier in May that also argued that the business model of major oil companies is broken.
Stevens said there is "growing disillusion on the part of their shareholders with a business model rooted in assumptions of ever-growing oil demand, oil scarcity and the need to increase bookable reserves.
These assumptions increasingly lack validity, he said.
"It's very tough for companies such as an Exxon, with a big corporate ego, to really reflect that it's the end of the oil age."
However, if the major oil companies can shift their business models they will be able to "slip into a gentle decline but ultimately survive, albeit on a much smaller scale," he said.
Al Monaco, chief executive of Enbridge Inc., said at the PwC forum that the industry is already responding to a changing world with lower costs and emissions and that it's moving away from the idea of growth for growth's sake.
"I think the industry has done a very good job over the last, let's call it five years, focusing on returns on capital. So it's not just about production growth for our industry, it's about making sure that when we invest capital it's earning a very solid return," said Monaco.
Energy analyst Jackie Forrest at Arc Financial said even if demand drops in the future, oil companies still need to invest in more production to maintain output.
But she said potential increases in carbon prices mean companies will likely opt for smaller expansion projects, while megaprojects like some in the oilsands will be harder to justify.
"Those projects are more challenged right now, and it's not just because of carbon policy. It's because there's real uncertainty around the future trajectory of the oil price, and the belief that it will be quite volatile," said Forrest.
Capital spending is already down considerably in Canada's oil and gas industry, with the Canadian Association of Petroleum Producers forecasting it will have dropped by $50 billion or 62 per cent from 2014 by the end of the year.
Those cutbacks are being echoed across the globe and the lack of spending on new production will mean big spikes in prices in the near to mid term, said Sankey. But with a long-term price decline coming, he said future investment should stay low.
"In the medium term we're very bullish on prices, and so we think you're going to make a lot of money over the next 10 years," said Sankey. "But you're going to want to prepare for liquidation over the next 20."
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