Oil majors face spending test from Iran war windfall cash

By Stephanie Kelly, Dimitri Rhodes and Sheila Dang

LONDON, Oct 20 (Reuters) - Oil majors are set to post a big jump in third-quarter profit as the US-Israeli war on Iran has boosted refining and trading results, while investors will monitor how wisely they use their cash piles and whether they resist a spending spree.

The severe disruption of the Strait of Hormuz since US-Israeli airstrikes began the war in February has pushed energy prices to multi-year highs, allowing trading desks to profit from the volatility.

In a sector notorious in the past for boom and bust, the majors have all promised this time to refrain from losing control of costs in what is one of the highest-earning years for global oil producers in recent memory.

Shell, BP and TotalEnergies all expect refining margins to increase three- to fourfold in the third quarter from a year ago, with Shell guiding for a record high of $42 a barrel. TotalEnergies expects cash flow from its refining and chemicals business to double to around $4 billion from the previous quarter.

Exxon signalled higher refining margins in the quarter could boost downstream profit by $4.5 billion versus the previous quarter.

ARE MAJORS ADAPTING THEIR SPENDING PLANS?

As majors report third-quarter results at the end of the month, investors are asking whether they will stick to their existing spending plans in times of exceptional earnings, wrote RBC Capital Markets analyst Biraj Borkhataria in a research note.

So far Chevron and Exxon have used the money to pay down debt. Investors in Chevron will monitor investment in Venezuela and its progress toward extending its contract to operate the TCO joint venture in Kazakhstan, which is developing the country's largest oilfield, analysts said.

HSBC expects Shell to announce a $3.5 billion buyback for the fourth quarter, after it reduced the pace of its buyback programme to a quarterly $3 billion earlier this year.

BP'S FORTUNES TURN

After the major's trading update last week, investment bank TPH called BP its favourite name among European majors. It said BP’s underlying profit could exceed $7 billion, versus $5.7 billion in the second quarter, boosted by refining and gas marketing and trading.

That cash is going toward repairing BP's balance sheet. Citi data shows BP’s net debt to operating cash flow falling from 1.7 times at the end of 2025, the highest of the five biggest majors, to an expected 0.8 times by the third quarter.

BP is likely to discuss its future capital allocation during its third-quarter earnings, HSBC said, as BP hits a target to reduce its net debt about a year early, also helped by pausing its buyback programme this year. BP has flagged a strategy update on December 15.

"We believe the priority will remain firmly on deleveraging, with stable capex and no buyback resumption before 2028," said HSBC's Kim Fustier and Sadnan Ali in a note.

Shell and Total are due to report on October 29 while BP, Chevron and Exxon are due on October 30.

(Reporting by Stephanie Kelly and Shadia Nasralla in London, Dimitri Rhodes in Gdansk and Sheila Dang in Houston; editing by Barbara Lewis)