In the current environment of weakening crude oil prices, energy giants are being forced to confront a series of difficult choices. In the coming months, previously generous shareholder returns are expected to face severe pressure.

Recently, major Western oil companies including ExxonMobil (XOM.US), Chevron (CVX.US), Shell (SHEL.US), and BP (BP.US) have all implemented layoffs and cost reduction measures. During this industry downturn cycle, these companies are seeking to tighten spending and weather the storm. This move stands in stark contrast to the industry situation from a few years ago.

In 2022, following the outbreak of the Russia-Ukraine conflict, fossil fuel prices soared, and the five major Western oil companies collectively generated nearly $200 billion in profits. With abundant cash flows, companies like ExxonMobil, Chevron, Shell, BP, and Total (TTE.US) chose to return these funds - which UN Secretary-General António Guterres called "windfall profits" - to shareholders through increased dividends and share buybacks.

According to data from Maurizio Carulli, global energy analyst at Quilter Cheviot, in recent quarters, many energy companies have allocated up to 50% of their operating cash flows to shareholder returns. However, Carulli notes that in the current environment of weak crude oil prices, this high-return policy poses risks - companies may take on additional debt beyond what a "healthy" balance sheet can bear.

Currently, BP has already adjusted its strategy, and Total recently announced plans to reduce the scale of shareholder returns. Carulli considers this a "wise directional shift" and indicates that other oil giants will likely follow suit.

Thomas Watters, Managing Director and Head of Oil & Gas at S&P Global Ratings, agrees with this view. In an email, he stated: "As crude oil prices soften, oil companies are under pressure. With OPEC continuing to release excess capacity and global crude inventories rising, oil prices could potentially fall to the $50 per barrel range next year. Facing the challenge of maintaining shareholder returns in a low oil price environment, many companies will cut costs and capital expenditures within their means."

Dividend cuts "would send shivers down Wall Street"

Clark Williams-Derry, energy finance analyst at the Institute for Energy Economics and Financial Analysis (IEEFA), points out that for oil giants, reducing share buyback programs might be the easiest option to implement. He explains: "Over the past few years, oil companies have returned cash to investors and supported stock prices through share buybacks. Compared to cutting dividends, reducing buyback programs is a better choice - for investors, buybacks are like 'icing on the cake,' while dividends are the 'core returns.' Once dividends are cut, it would certainly send shivers down Wall Street."

Earlier this year, Saudi Aramco reduced what was the world's largest dividend due to uncertain oil price prospects. Williams-Derry believes this move is closely related to Saudi Aramco's continued stock weakness for most of this year, and other private oil giants clearly don't want to repeat this mistake.

Ultimately, Williams-Derry suggests that as the oil price boom triggered by the Russia-Ukraine conflict comes to an end, oil giants now need to face three core questions: "Should they continue borrowing to maintain shareholder returns? Should they cut share buybacks (which would lose one of the key factors supporting stock prices)? Or should they reduce drilling activities (which means future production will decline)? Each choice carries risks, and regardless of the decision, some investors will inevitably be dissatisfied."

Oil Giants' Outlook

In the view of some analysts, the current situation for oil giants is not as bad as expected. Peter Low, Co-Head of Energy Research at Rothschild & Co Redburn, states: "Earlier this year, market expectations were generally pessimistic. Since Trump announced additional tariffs in April, the market has been worried that oil prices would fall into oversupply and price collapse by year-end. But the actual situation exceeded expectations - oil prices showed strong resilience, roughly stabilizing in the $65-70 per barrel range."

However, oil prices have now fallen below this range. At the time of writing, December-delivery Brent crude futures were trading at $63.63 per barrel, while November-delivery West Texas Intermediate (WTI) futures were at $59.28 per barrel.

Low notes: "Compared to the third quarter, the core issue for the fourth quarter may be more about the extent to which companies need to reduce shareholder returns (especially share buybacks) to adapt to the weakening commodity price environment. Given that third-quarter performance was still acceptable, these companies may choose to wait and see market trends in the coming weeks and months, and the fourth quarter may become a better time for them to reassess their shareholder return policies."

It is reported that Total and Shell both plan to release third-quarter earnings on October 30 local time, ExxonMobil and Chevron will follow on October 31, and BP is scheduled to disclose quarterly results on November 4.