HOUSTON and LONDON (Bloomberg) --It was Andrew Swiger, the chief financial officer at Exxon Mobil Corp., who summarized the attitude of the whole industry after Big Oil ended reporting another dismal set of quarterly earnings: “Prices will have to rise.”

After months of low oil and gas prices driven by weak demand, the world’s largest international oil companies have largely exhausted their financial defenses, leaving little room to maneuver if they’re dealt further blows. Exxon Mobil Corp., Chevron Corp., Royal Dutch Shell Plc, Total SE and BP Plc have already reduced 2021 spending probably to as much as they can.

With the exception of perhaps Chevron and Total, which entered the downturn with the strongest balance sheets, leverage is approaching uncomfortable levels. Put together, Big Oil is now completely at the mercy of a worldwide rout in fuel demand that, absent a Covid-19 vaccine, shows no signs of abating, as well as OPEC+ leaders Saudi Arabia and Russia.

“I will say that a lot of the performance of the company today, but also in the future, will depend on the macro environment that we will be enjoying or suffering as the case may be,” said Ben van Beurden, chief executive officer of Shell.

Debt Dilemma

Brent crude closed this week below $38 a barrel, bringing the year’s decline to 43%. At such levels, the industry is underinvesting in supply to such an extent that shortages are inevitable in the future, which means higher prices, Exxon’s Swiger argued. But a price recovery relies on two other things: higher demand and OPEC+ holding the line on production curbs, underpinned by the often uncomfortable alliance between Russia and Saudi Arabia.

With U.S. Covid-19 cases hitting a record this week and new lockdowns looming across Europe, the virus and its impact on petroleum demand show no sign of abating. And for all the brainstorming of executives from Dallas to Paris, the oil supermajors account for less than 15% of pre-pandemic global oil demand. If supply discipline is to succeed, the heavyweight national oil producers will have to work together, and Crown Prince Mohammed bin Salman and President Vladimir Putin must continue to get along.

One bright spot is U.S. shale production, which is in free all after a decade-long, debt-fueled surge that surprised the supermajors and loosened OPEC’s power over the oil market. Executives at some of the biggest U.S. independent oil producers believe America may never return to peak production seen earlier this year, and that further declines are likely in 2021.

Big Oil CEOs can do little to foster geopolitical cooperation, but for the last six months they have been pulling all the levers they can to stop the bleeding of cash. Or in corporate jargon, they have focused on self-help: Curtailing unprofitable production, reducing spending and future investment, and firing tens of thousands of employees.

Exxon is paradigmatic of the trouble the supermajors are in. A year ago, the Texas-based company was targeting 2021 capital expenditure of as much as $35 billion; now, it’s planning to spend half that. It announced this week it will reduce its staff and contractors by 15%, or 14,000 people, by 2022. Even then, Exxon is spending more than it’s earning, with capital and dividend outlays consuming all its cash from operations.

Many in the market think the situation is unsustainable, and if prices don’t rise, Exxon will have to cave and cut the dividend for the first time in more than four decades. “The message is clear: Equity needs the protection of higher oil prices,” said Alastair Syme, a London-based analyst at Citigroup Inc.

Shell and BP cut their dividends earlier this year but are still weighed down by high debt levels. Shell outlined an intention to increase the payout this week. Still, that would need higher oil prices, and take decades of small hikes to reach prior levels.

Cost cutting appeared to bear fruit in the third quarter, with four of the five large Western majors posting profits on an adjusted basis. But they can only cut so far.

Regaining Relevancy

Chevron, for example, plans to invest just $14 billion next year, even after recently buying Noble Energy Inc. That’s not far above the $10 billion level that the company has historically said is the minimum to sustain production. CFO Pierre Breber said the company would let oil volumes drop if it made financial sense. “We’re not trying to sustain short-term production,” he said.

The question is not will Big Oil survive but whether it can still make investors care. BP and Shell are no longer the dividend linchpins of European stock markets. Exxon, the profit powerhouse that dominated the top spot on the S&P 500 Index for years, now ranks outside the top 50. Energy is now worth about 2% of the S&P 500 Index, making it a rounding error in many generalist fund managers’ portfolios.

“Making energy relevant and investable again is the million dollar question,” said Jennifer Rowland, a St. Louis-based analyst at Edward Jones. “They’re still trying to figure that out.”

For Rowland, having a compelling strategy in a low-carbon future is key. While that hands an advantage to the Europeans, who are pledging net zero emissions by mid-century, unlike Exxon and Chevron, BP and Shell still need a recovery in their traditional businesses to fund the move, Rowland said. With less cash, a green pivot becomes more difficult.

Exxon’s Swiger is convinced that prices will recover. Things are so bad that prices across oil, refining and chemicals are “at or significantly below bottom of the cycle conditions,” he said. Whether Big Oil investors are willing to wait for that forecast to come true remains to be seen.