Part II – How Big Oil is Trying to Win Back Investors

On May 27th 2020, ExxonMobil, Chevron and BP all had their annual shareholder meetings which did not have the desired outcome. To date, Covid-19 has caused a deep collapse in the demand for oil.

The breakeven oil price required to trigger fresh capital spending and maintain dividends for the seven supermajors – ExxonMobil (mcap of $192bn), Chevron ($171bn), Shell ($121bn), Total ($95bn), BP ($76bn), ConocoPhillips ($45bn), and Eni ($33bn) – is half of what it was in 2013. According to some brokers Shell’s breakeven oil price is down to $30/bbl in 2020 from $150/bbl in 2013.

However, even before Covid, investors were looking for investment opportunities that were lower risk and higher returns. Over the past four to six years, Energy was the worst-performing sector on the S&P 500. (Energy stocks on the S&P have a market value of USD 3 trillion). Energy stocks’ market value contribution to the S&P 500 dropped to 5% in 2019 from 15% in 1990; a 67% decrease. 

As a result of Covid, oil companies are working towards a low-carbon future but it is not clear how quickly the supermajors should move away from oil investments or even if they should. U.S. giants ExxonMobil and Chevron are of the opinion that they should not.

Compared to the U.S., European supermajors look like ‘tree-huggers’ but their efforts can be considered somewhat vague.

  • Total has promised to become net-zero; but only for products supplied to Europe.
  • BP is consistently under pressure from activists to explain how it will meet climate targets.
  • Norway’s Equinor delegated only 8% of capital spending to renewables in 2019.

While the current global sentiment is to move towards cheaper energy sources such as coal, as a result of the volatility in the markets, there are still funds available for companies that have sustainable business activities. Oil companies will need to start playing catch up to renewables if they hope to get a piece of the pie.

One example is Iberdrola, a Spanish utility company that uses solar and wind power. Iberdrola has reached a mcap of $68bn, overtaking Eni ($33bn) and Equinor ($48bn), and quickly catching up to BP ($76bn).

Covid-19 has caused a lot of uncertainty in the markets, however investors had already been looking to diversify their portfolios. Moving into the renewables market is no surprise. Resources are abundant, cost-efficient, and in many cases cannot be depleted.

This is not to say that the O&G market still is very much a part of the present and still potentially the future, no one should write it off, but it has a lot to do.

Governments and individual companies always seek cheaper energy sources, at the moment this is very much in fossil fuels’ favour. In the short-term the assumption is that ‘cheapest’ source is the way to go, i.e. coal. In the long-term we expect to see a greater percentage of capital reallocation to renewables. The capital allocation factor will only become a permanent and fatal threat to fossil fuels once the capital/KWh and LCOE for renewables unequivocally falls below that for fossil fuels. Solar looks close on both counts, the other renewables have a way to go.

On the other hand, public pressures from environmental activists and a lack of interest from ESG oriented investors could make O&G a thing of the past sooner than we expect. It seems likely that incorporating environmentally safe business practices will no longer be optional but mandatory for O&G.

If the supermajors refuse to adhere to pressures to change their business operations, it can only leave more room and opportunities for small and mid-cap oil companies to take advantage of what investors are looking for. It would also provide them with access to the pools of cash that are available to companies that operate sustainably.

 

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