Big Oil was forced to make some tough choices as “monster profits” fade into memory

The energy supermajors are being forced to make some tough choices in a weaker crude oil price environment, with generous shareholder payouts expected to come under severe pressure in the coming months.

American and European oil companies, including ExxonMobil, Chevron, Shell And BPhave recently been cutting jobs and cutting costs as they look to tighten their belts amid an industry downturn.

It reflects a stark change in mood from just a few years ago.

In 2022, the West's five biggest oil companies made a combined profit of almost $200 billion as fossil fuel prices soared following Russia's massive invasion of Ukraine.

Flush with cash like Exxon Mobil, Chevron, Shell, BP and Total Energies tried to use what UN Secretary General António Guterres described as their “monster profits” to reward shareholders with higher dividends and share buybacks.

According to Maurizio Carulli, global energy analyst at Quilter Cheviot, the amount of cash returns as a percentage of cash flow from operations (CFFO) for several energy companies has risen as high as 50% in recent quarters.

However, in the current environment of weaker crude prices, Carulli says this policy risks creating new debt levels beyond what could be considered a 'healthy' balance sheet.

BP and, more recently, TotalEnergies have announced plans to take steps to reduce shareholder returns.

Quilter Cheviot's Carulli described this as a “sensible change of direction” and noted that other oil companies are likely to follow suit.

Thomas Watters, managing director and sector leader for oil and gas at S&P Global Ratings, echoed this sentiment.

“Oil companies are under pressure as crude prices soften, with prices likely to fall toward the $50s next year as OPEC continues to release excess capacity and build global inventories,” Watters told CNBC by email.

“Faced with the challenge of maintaining these returns in a lower price environment, many will look to reduce costs and capital expenditure where they can,” he added.

Clark Williams-Derry, energy finance analyst at the Institute for Energy Economics and Financial Analysis (IEEFA), a nonprofit organization, said scaling back share buybacks is likely Big Oil's easiest option.

“In recent years, oil companies have used buybacks to return money to investors and support stock prices. And it's better to cut back on buybacks than on dividends: For investors, buybacks are gravy, but dividends are the meat,” Williams-Derry told CNBC by email.

“A dividend cut would shake Wall Street,” Williams-Derry said.

That's exactly what Saudi state oil producer Saudi Aramco did earlier this year, cutting the world's largest dividend amid an uncertain oil price outlook.

IEEFA's Williams-Derry linked the move to a steady weakening in Saudi Aramco's share price for most of this year, noting that other private oil companies will want to avoid the same fate.

Ultimately, Williams-Derry said oil giants likely need to consider three questions now that Ukraine's oil price boom has subsided.

“Do they continue to take on new debt to finance payouts to their shareholders? Do they cut back on buybacks, eliminating one of the key factors that support stock prices? Or do they cut back on drilling, which is a sign of weaker production going forward?” said Williams-Derry.

“Every choice carries risks, and whatever they choose will undoubtedly make some investors unhappy,” he added.

For some, Big Oil's current situation isn't nearly as bad as it could have been.

“It may not have been as bleak as people expected earlier this year because you've had this narrative, really since Trump's tariff announcement in April, that the oil market was supposed to go into a glut and a period of oversupply later in the year,” Peter Low, co-head of energy research at Rothschild & Co Redburn, told CNBC via video call.

“What has actually surprised people is how resilient oil prices have been, staying more or less within the $65 to $70 per barrel range,” he added.

Oil prices have since fallen below this range.

International benchmark Brent crude futures due in December traded 0.4% lower at $64.97 a barrel on Friday, while U.S. West Texas Intermediate futures due in November fell 0.3% to $61.24.

“The question, probably less for the third quarter and perhaps more for the fourth quarter, is really how much distributions and buybacks in particular should be reduced to reflect a weaker commodity price environment,” Low said.

“I think given that the third quarter was OK, they will probably wait to see what happens in the coming weeks and months and the fourth quarter would be a more natural time for them to re-examine shareholder distributions,” he added.

TotalEnergies and British Shell will both report third-quarter results on October 30, while Exxon Mobil and Chevron will follow suit on October 31. BP is set to release its quarterly results on November 4.