On the heels of falling revenues and slimmer profits that were reported in the second quarter, a pro-renewable energy group issued a study casting doubt on the supermajor business model.

However, an analyst pointed out that those companies’ treasuries are overflowing with cash and likely to remain healthy. Exxon Mobil, for instance, held $29.6 billion in cash and equivalents at the end of the second quarter while Chevron Corp. held $9.29 billion, according to their financials.

Even large independents such as ConocoPhillips have billions in cash.

But the Ohio-based Institute for Energy Economics and Financial Analysis’ questions if that can last. The group's new study charts declining futures of oil prices for the next 10 years and predicts declining free cash flows. Much of the world has adjusted to the energy disruptions caused by Russia’s February 2022 invasion of Ukraine, and prices are down, said Clark Williams-Derry, an energy finance analyst at IEEFA.

“There was a bubble created by the Ukraine crisis, but that bubble—that Ukraine dividend—is evaporating. The bubble is bursting. Prices fell in the first two quarters,” he said. “The industry went from being one of the leaders in the stock market to one of the laggards.”

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In the first half of the year, the energy sector fell in the S&P 500, but many analysts said the drop needed to be put in the proper context of how well it did the year before. Many energy company fundamentals are still strong with several reasons to expect continuing demand for oil and gas.

Doug Reynolds, managing director of energy and power at Piper Sandler, also tracks oil and gas companies and their FCFs, and he said he does not believe the sector is headed for cash shortages.

“I'm a big believer in the attractiveness of the sector. I’m a big believer in the power of the free cash flow generated by 12 to 13 million barrels of oil a day and a very significant amount of natural gas that's being produced every day—about a hundred billion cubic feet a day. Those are big numbers. They produce big amounts of cash flow, and offer really great returns to investors,” he said.

He added that meaningful improvements to drilling such as geosteering, longer laterals and lower cycle times are improving efficiencies.

“The rates of return at the wellbore are improving. The industry kind of continues to figure out ways to make better returns even at the same commodity price,” Reynolds said.

According to its website, the IEEFA research work shows “renewable energy sources are steadily eroding reliance on fossil fuels.”

Williams-Derry said the five supermajors—Chevron, Exxon Mobil, TotalEnergies SE, BP and Shell—have a total of FCF in the second quarter of 2023 that is 56% less than the second quarter of 2022 at a time when commodity prices have skyrocketed.

Williams-Derry’s analysis showed numbers that these companies’ FCF, minus the hefty dividends and stock buybacks, totaled nearly $100 billion last year, and he predicts this will drop so low that the supermajors will have to go to other sources for that capital return to investors later this year.

“The companies paid more to shareholders than they generated by selling oil and gas,” he said. “They could do that over the past two quarters, because they had built up a cash cushion over the prior two years, but it’s the sort of thing that long-term investors don't particularly like. In the decade leading up to COVID, Exxon—long regarded highly by investors because of its record of maintaining high dividends—had to borrow money to keep dividends and share buybacks flowing. That made investors skittish.”

Williams-Derry said the supermajors cannot thrive if oil is less than $80/bbl. That contrasts with Exxon Mobil’s targets. The company said its dividend breakeven price is $35/bbl. TD Cowen analysts in March forecast a $45 breakeven, with the current breakeven increasing to $70/bbl when including stock buybacks.