Over the past couple of weeks, Big Oil majors reported a string of record profits for 2022. This was no surprise after an even longer string of record quarterly income reports as oil and gas prices soared during much of the year. What was a surprise was an apparent change in investors’ sentiment towards their industry.
Energy industry vet and market analyst David Blackmon last week noted in a podcast that U.S. oil companies have been outperforming their European peers consistently thanks to their greater focus on their core business. Meanwhile, their European counterparts strived to respond to certain shareholders’ expectations of a transition in tune with the greater, government-led transition to low-carbon energy.
Certainly, pressure from governments and activist groups is a lot stronger on European oil companies than American ones, but when it comes to share prices, it’s usually pragmatism that leads investors.
It was this pragmatism that led to the divergence between the valuations of U.S. and European oil majors, according to Bloomberg. It is this pragmatism that is now rewarding European Big Oil with higher market caps, after their record 2022. And this pragmatism was invoked when the Europeans had a change of heart with regard to their transition plans.
The three biggest European oil and gas companies—BP, Shell, and TotalEnergies—all announced plans that involve a sort of return to their core business and an easing back on their transition plans. The move is subtle, it is far from a U-turn, but it is a pretty clear one.
BP said it would continue to work towards reducing its emissions footprint by cutting oil and gas production, but it revised its target for these production cuts by as much as 25 percent. Its earlier target was an output reduction of 40 percent from 2019 by 2030.
Shell is planning to leave its investments in renewable energy where they are and spend more on expanding gas operations. “Our philosophy has been a real pivot toward energy transition investments,” new CEO Wael Sawan said. “But we will make sure that those investments go into the areas where we can see line of sight toward attractive returns to be able to reward our shareholders.”
TotalEnergy, meanwhile, will be focusing on liquefied natural gas after a stellar year for that commodity amid the European energy crunch that began in the autumn of 2021 but flourished in 2022. CEO Patrick Pouyanne referred to LNG as a pillar of TotalEnergies’ growth in the future.
Given these companies’ efforts in the past few years to make themselves more attractive for investors by demonstrating their determination to move beyond fossil fuels, such a change may seem strange at first. But the stock performance of all three tells a different story.
It is the story of investors who buy into a company not because of its transition plans but because of its shareholder returns plans. It is the story of a reality check that overrides the shareholder resolutions used by environmental activists with the means to build large shareholdings in Big Oil companies as a tool to pressure these companies into essentially giving up the business that made them big.
The stock prices tell the story: the shares of BP, Shell, and TotalEnergies all rose after they reported on their 2022 performance and future plans. The jump was particularly marked for BP. It could be because of the revised production cut plans of the supermajor. After years of diverging, the valuations of European and American supermajors are moving in the same direction because their strategies are realigning.
Of course, not everyone is happy with this. Climate change activists certainly aren’t. As the Bloomberg report noted, even a short-term refocusing on returns over the climate could be detrimental to climate change mitigation efforts.
Yet Big Oil companies or any company really are not activists. They are not in the business of mitigating climate change, even if their stated net-zero plans have this as their ultimate goal. Like every other company, Big Oil is in the business of making a profit from selling products and services and sharing it with its owners—also known as shareholders.
It is this simple truth that drives corporate decisions on spending and production growth or de-growth. It’s the most fundamental rule of economics, and that’s the rule of supply and demand. As Shell’s former chief executive Ben van Beurden once put it, while the world needs oil, we will continue to supply it with oil.
The other pretty simple truth that prompted Big Oil majors to step back from their transition path may well have been the subpar performance of low-carbon energy lately. Cost inflation, component failures, and trade tensions with China, the undisputed leader in the manufacturing segment of the renewable energy industry, have all combined to push returns from these ventures lower.
Government subsidies seem to have not been enough to motivate Big Oil to stick to that path without even looking at alternative routes to its promised net-zero future.
By Irina Slav for Oilprice.com
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