What's Next for Oil Companies?

“If there's any business for which changing course really is like turning around a supertanker, it's Big Oil.

 

At the beginning of this year, the Western world's five large, integrated energy companies were talking about things like "structural cost efficiencies," "consistent delivery" and "superior shareholder returns, despite declining oil prices." Those are hardly words that send investors' pulses racing.

 

Then, war with Iran delivered a price windfall more quickly than business plans could adjust to it. Compared with last year, the group is expected to generate about $75 billion more free cash flow in 2026. Figuring out what to do with extra money is a nice problem to have, but still a problem. Investors tend to think of dividends and buybacks as ways of returning cash to shareholders. Paying down borrowings is an equally valid route to enhancing owners' wealth.

 

BP stands out in addressing that part of its balance sheet. It was the most indebted of its peers at the beginning of this year, and new management pledged to fix that by selling assets and halting stock buybacks. During the second quarter, BP cut various financial liabilities, which include debt, hybrid debt, leases and settlement payments for the Deepwater Horizon disaster, by $7 billion.

 

Analysts surveyed by FactSet expect net debt for the five supermajors combined to fall by $70 billion between 2025 and 2028. The transformation at smaller pure-play drillers and refiners will be more dramatic. Expand Energy and Valero are seen having net cash on balance sheets by 2028.

 

Then what? It's tempting to drill, baby, drill, especially with exploration costs and shale-patch break-even prices becoming more reasonable. But sinking much more money than planned into major oil and gas projects is hard to justify unless there's a strong case that commodity prices can stay higher for longer. And drilling too much today could produce its own bust tomorrow.

 

In addition to buying back more of their own shares, companies could use cash to start buying one another. Deals tend to be announced when prices are moderate rather than historically high or low.

 

The last big supermajor takeover was Chevron's $53 billion deal for Hess, an all-stock deal announced in 2023 and completed last summer. A year earlier, Exxon closed its $60 billion acquisition of Pioneer Natural Resources, also for stock.

 

Healthy balance sheets make smaller all-cash acquisitions in the single-digit billions of dollars more likely. That may be especially tempting in the next 2 1/2 years, before the next president takes office. It's a window of opportunity for more consolidation while U.S. antitrust enforcement is still energy-industry friendly. One way or another, more cash is headed shareholders' way. Some will be gradual, but expect some to arrive in big chunks amid press releases touting "synergies" and "world class assets."” [1]

 

1. What's Next for Oil Companies? Jakab, Spencer.  Wall Street Journal, Eastern edition; New York, N.Y.. 19 Aug 2026: B11.