Searching for the bottom line

The European oil majors’ first-quarter results are in, and the headlines are unanimous: the sector is roaring as profits are soaring.

The latter cannot be denied. Statoil’s profit was up by 74pc, Total’s by 56pc. Shell turned a four-fold increase in profit. Even BP was in the black. Compare with last year – as we must – and the bottom line is looking fine.

All this is pretty remarkable. These are not the good times. Benchmark Brent crude futures have sneaked below $50/bl to their lowest point of the year. There’s an LNG glut. To a large degree, the majors are subject to forces outside their control — on one side nippy debt-fuelled operators in the US Permian basin; on the other side Opec technocrats with their hands on the spigots.

Yet, the profit rebound should not come as a surprise. On life support in the first quarter last year, the firms are now leaner and fitter for purpose. They’re feeling better because this time last year they couldn’t have felt worse.

And sometimes the bottom line is not the bottom line, not even the majors’ distinctive bottom line that smooths out the effects of inventories. One metric of success does not necessarily fit all, despite the impositions of financial reporting standards.

The big four European firms are so large, so unwieldy, that the closer you look the less they resemble one another.

Oil and gas firms, yes. But Shell’s purchase of BG has shifted its focus toward the latter, meaning it is less exposed to the vagaries of the oil price than, say, Statoil. The Norwegian firm, in turn, has but one refinery where Total has five. Total has a growing interest in renewable energy, while BP went beyond petroleum and back again some years ago. BP is still battling the unique financial constraints imposed upon it by the Macondo oil spill. Each firm has an eye on petrochemicals.

One cross-company barometer of health is free cash flow (FCF) — is the company generating enough money to cover its spending needs? It is at this level that the success or otherwise of the severe cost cutting, put in place over the past couple of years, becomes evident.

And, by this touchstone, things are also going well. Shell delivered surplus cash without banking any asset sale proceeds in the quarter. Statoil delivered FCF after not doing so a year ago. Total generated more cash than at any time since the third quarter of 2013. Only BP failed to deliver, burdened as it is by the Macondo bill. But its guidance suggests it will be able to cover capital expenditure and, importantly, dividends by the end of the year.

That is the sign of health — turning a profit while living within one’s means. So let the diluted, toned-down good times roll.

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