As the major international oil companies report their fourth-quarter and full-year 2025 earnings, management is highlighting the challenges they face in 2026. Three words sum up the challenge: low oil prices. One word is the response: austerity.
Executives and investors watched global oil prices slide steadily throughout last year as oversupply concerns weighed on the market. Projections are for an even larger oversupply in the first half of 2026, which will cap any oil price rally and continue to pressure prices. The world needs reduced geopolitical tensions for economies to fully rebound and restore historical annual growth rates in oil demand.
Surprisingly, oil prices, although meaningfully lower than this time last year, have not fallen as far as some forecasters predicted. That likely reflects the physical realities of the global oil market — reduced oil company investment in new production will lead to lower output, closing the gap between supply and demand. The unknown is how quickly the gap will close.
In the meantime, oil companies face shrinking cash flows due to lower prices despite higher production. How those cash flows are allocated has changed since the 2015 oil price crash and the resulting recession. By the time the industry stabilized, after it drastically reduced costs and consolidated players, the world was engulfed by the Covid pandemic. For the first time, oil prices went negative as the industry struggled to shut down production amid a drying up of demand.
Coming out of this industry turmoil, investors demanded new metrics for companies. Production growth at any price was no longer rewarded. Investors required that cash flow be allocated to sustaining production, reducing corporate debt, and returning the surplus to shareholders through dividends and stock buybacks. Financial discipline became the new industry mantra.
With current low oil prices and prospects that prices might fall, oil company executives are reassessing their balance sheets and monitoring production to determine how much money they can return to shareholders. For most European oil companies, significantly higher debt-to-equity ratios than those of their U.S.-based competitors have prompted warnings that share repurchases will be scaled back. Several companies have already announced cutbacks.
On the other hand, no U.S.-based international oil company has announced planned share repurchase reductions. In fact, they have emphasized their strong balance sheets and focus on reducing operating costs, including headcounts, to sustain reinvestment in new resource developments and high returns to shareholders.
Periodically, austerity becomes the watchword for the oil industry. Cost-cutting to improve operational efficiency and investing in technology enable companies to stabilize cash flow margins. It is the traditional oil industry playbook, used many times. It will be employed once again in 2026.
