(Bloomberg Opinion) -- Crown Prince Mohammed bin Salman will reportedly spend the weekend musing on whether to finally pull the trigger on the world’s biggest, and most elusive, IPO. At this point, it’s impossible to say if he will finally give the thumbs up for Saudi Aramco’s debut. Yet he may take some encouragement from a Big Oil earnings week that has been, to use the old euphemism, mixed.
All but one of the big five — BP Plc, Chevron Corp., Exxon Mobil Corp., Royal Dutch Shell Plc and Total SA — beat earnings estimates (and even Chevron’s miss owed much to a one-off tax charge). On the other hand, analysts spent the summer lowering the bar, so the companies all won in the way all the kids win at Saturday morning soccer.
All that really matters is how much cash they’re generating and what they’re doing with it. And it’s here that things got mixed, even garbled at times — and which might provide Saudi Arabian Oil Co. an opening.
All five oil majors covered capital expenditure from internal cash flow, and all except Exxon covered dividends too. Beyond this, only Chevron and Shell have buyback programs of any appreciable size; and of the two, Chevron was able to cover that from operating cash flow.
Not bad, but problems lurked for most. Exxon’s continuing out-of-sync upswing in capex, while bearing fruit in Guyana and elsewhere, leaves it borrowing to cover dividends for now. Chevron’s numbers were much more in tune with what oil investors demand these days. However, cost inflation in its Tengiz expansion project in Kazakhstan provided an unwelcome reminder of the bad old days, when hefty capex bills pushed free cash flow sharply into the red. Chevron didn’t raise its annual capex budget, though.
Over in Europe, Total delivered a solid quarter, adding credibility to its recent dividend increase. The biggest stumbles came from Shell and BP, and their stocks were punished swiftly. Both fumbled a recalibration of investor expectations around payouts. BP was forced to clarify it hadn’t yet decided on dividends after its CFO suggested on the earnings call that a much-anticipated increase might have to wait until next year. Shell, meanwhile, distributed almost as much cash as Chevron and Exxon combined last quarter. But it ended up hosting a largely defensive analyst call after saying a weaker economic outlook could cause it to slow buybacks next year.
Shell’s drubbing was perhaps the most ominous. We expect investors to revolt if dividends are frozen or suspended. In this case, they threw up their hands at an oil major slowing prospective buybacks due to deteriorating macro conditions. If the industry needed any reminding their owners remain laser-focused on extracting more cash from them, then this provided it.
This is Aramco’s potential opportunity. I am skeptical of both the likelihood of MBS getting his desired $2 trillion valuation and even its utility. Why simultaneously cap the potential gains of ordinary Saudi shareholders and create a country-sized shorting opportunity? But recent moves to reduce Aramco’s royalty rates and to guarantee dividend payments to minorities for five years show its bankers have gotten the message from potential investors.
It is worth remembering Aramco’s IPO is in itself a sign that oil’s growth prospects are dimming. This is a big reason why energy stocks are so out of favor, with weighting in the stock market at historic lows. In all likelihood, therefore, if and when Aramco does come to market, a significant proportion of international investors deciding to buy will do so via reallocation from existing energy or emerging-market portfolio holdings, rather than injecting a lot of new money. Much as Riyadh likes to think of Aramco as being in a class of its own, it will have to compete for interest like any other oil major once it dips a toe into the public equity market.
The flip side is that the gravitational pull of an Aramco IPO presents a hazard for the oil majors, which, in this light, represent pools of capital to draw upon. That isn’t to say someone holding Exxon is bound to redeploy toward Aramco’s stock, given their differing risk profiles. But some is bound to leak away, and Aramco’s emphasis on payouts is a powerful counterargument set against these recent results. Of the five, Shell and BP look most at risk given their mixed messages on dividends next year and relatively high leverage. But Exxon, too, may struggle to prevent defections given high spending and a lack of buybacks.
Having also worked quickly to calm nerves after September’s missile attacks on its facilities, Aramco has also suppressed the higher oil prices that would bolster bigger payouts by its western rivals next year. The prince’s inexplicable fixation on that $2 trillion number may yet delay the IPO once more. But in competing for the relatively limited pool of dollars targeting energy these days, this week’s earnings from Aramco’s rivals provides good reasons to make a move.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.
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