How Sustainable Are Big Oil Dividends?

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Antonio Garcia

Dr. Antonio García is a lecturer in finance at the Public University of Navarra and EMBA candidate at the EAE Business School. His academic includes…

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By Antonio Garcia – Sep 30, 2024, 3:00 PM CDT

The O&G industry uses dividends and share buybacks to signal financial stability and attract investors.
Record profits from rising oil prices, especially post-Ukraine invasion, have been criticized for benefiting from global crises while the industry invests minimally in renewable energy.
The “New Energy Trilemma” highlights the industry’s struggle between prioritizing dividends, fossil fuel investment, and renewable energy.

The dividend payout has long been considered a corporate policy commonly used to send signals to the market. According to signaling theory, companies tend to pay dividends to convey a positive message to investors about profits and cash flow. The O&G industry is known for maintaining a stable dividend payout, increasing dividends when companies decide they also need to boost the share price and, therefore, the company’s value. Some analysts argue that an increase in dividend payments encourages pension funds to own more energy stocks. However, the industry is currently under significant pressure from both the market and society, which is pushing for divestment due to concerns over environmental impact and the energy transition. O&G companies are returning more money to investors than ever before, through both dividend payments and share buybacks, in an effort to restore investor confidence and address the uncertain future of the industry. O&G executives have indicated that profit-sharing is preferable to increased production, as investors favor immediate returns over long-term investments in mega-projects that take years to yield profits.

Note: Own elaboration based on the data provided by the Eikon Refinitiv by Thomson Reuters database.

Another reason why O&G companies have set record dividend payouts in recent years is because of the uncertainty in the sector due to the energy transition that causes the assets and businesses they currently have in their portfolio to lose value over time. Large oil companies are returning as much as possible to investors so that they do not leave for other sectors or companies. According to Mike Wirth, CEO of Chevron, “During a time of geopolitical turmoil and economic uncertainty, our objective remained unchanged: safely deliver higher returns and lower carbon.” This position has been strongly criticised by some environmental groups, indicating that the significant amount of dividend payouts by these companies is a strategy to distract the investor and try to hide the risk of an imminent energy transition.

After the invasion of Ukraine and the subsequent rise in benchmark crude oil prices, O&G companies were the main beneficiaries and raked in a combined net income of $4t. These huge results were a reason for debate, with many politicians and environmentalists pointing out that these record incomes were due to the unfortunate invasion of Ukraine, accusing oil companies of taking advantage of the situation, which resulted in extremely high utility bills for consumers. This situation of record revenues resulted in a considerable increase in profit distribution in 2022. The 5 super majors – BP, Shell, Chevron, ExxonMobil and TotalEnergies – filed dividend payouts and share buybacks worth $104 billion. Far from ending this trend, companies such as ExxonMobil and Chevron have maintained considerable profits at the end of 2023, showing that the industry remains robust and reliable despite doubts about curbing climate change and investing in renewable energy.

One of the most controversial points is the possible destinations of those record profits that the industry has presented in recent years. A so called New Energy Trilemma results from the relevance for society of the decision by these companies to invest their large profits in three different points: paying dividends, investing in O&G, or betting heavily on the energy transition and renewable energies. Despite recent years being the hottest on record, sparking concerns about climate change, the O&G industry has done relatively little to address the problem. Environmental groups have harshly criticized the industry for distributing historic profits without significantly increasing investment in renewables.

Oil companies have pointed out that energy security remains one of the most important factors, and that rising demand for hydrocarbons in emerging economies warrants continued large investment new oil and gas production.

Generally speaking, current investment in green technology by the O&G industry is usually related to current business activities (CO² capture and storage, or the electrification of its offshore plants, for example). In recent years, the O&G industry has spent only 1% of its investment on renewables. According to the IEA, companies are prioritizing two lines of action of the New Energy Trilemma, dividends and O&G production. In this way, investment in clean energy is put on the back burner. Companies such as Shell and BP recently announced their commitment to fossil fuels, while cutting back on clean energy investments they had previously committed to. A decision that, for example, in the case of BP, pleased investors, resulting in higher share prices.

The future of this industry and its influence on society will depend much on this New Energy Trilemma. Handing out generous dividends to investors in order to stay invested in the O&G industry may not be sustainable in the long term. Also, reduced investment in renewables signals that O&G companies remain skeptical about long and short-term profitability. Perhaps more worrisome is that without the strong involvement of this industry, the ambitious aspirations to curb climate change and decarbonise society are still a long way off. Until the industry considers clean energy investment a profitable investment, they will continue to pay big dividends and continue traditional investment in O&G.

By Antonio Garcia for Oilprice.com

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