Energy giants BP and Shell unveiled sharp downturns in their usual earnings last week in a rocky third quarter for the sector, with the oil and gas industry failing to match last year’s record profits.
While oil prices have recently rallied following Hamas’ attack on Israel and gas prices have bounced amid sustained industrial action at Australian LNG plants, commodity prices have cooled significantly since Russia’s invasion of Ukraine – which is now being reflecting in the bottom lines of fossil fuel majors.
London-listed contenders BP and Shell were not immune to this slide in profits, posting year-on-year downturns of 60 percent and 38 percent respectively.
BP and Shell have sought to keep shareholders sweet as markets normalise, handing out a combined £4bn to investors in recent days.
This isn’t a new strategy for them, with the two companies collectively offering £50bn to shareholders through dividends and share buybacks since Russia’s invasion of Ukraine, according to reports from Global Witness.
Nevertheless, what is fascinating is the contrast in the shareholder reaction to declining profits between two of the FTSE 100’s biggest companies.
How Shell has surged while BP blunders
BP’s year-on-year decline in still-robust earnings from £6.8bn to £2.7bn in the third quarter saw its share price slump more than three percent on the FTSE 100 after its results were announced last Tuesday.
By contrast, just two days later, Shell’s slide from £8.1bn to £5.1bn over the same period saw its stock rise nearly two percent during later trading on Thursday.
On first glance, the distinction between both companies is difficult to explain.
Both are chiefly fossil fuel producers, both have been lightning rods for political and media criticism with the government bringing in a windfall tax to harness their profits, and both are targets for environmental activism from green campaigners.
When it comes to policy, Shell and BP have each agreed to commit to net zero over the next three decades – a now default stance which even includes the US titans.
However, they have also both opted to water down their intermediate pledges this year to cash in commodity prices before they normalise.
BP has eased its commitment to reduce emissions in oil and gas this decade from 40 percent to 25 percent, while Shell has also slashed its short-term oil and gas reduction pledges.
However, rhetoric also matters – especially with markets heavily influenced by investor sentiment.
Shell – alongside Exxon and Chevron – has been bullish in positioning itself as an oil and gas company first, using the war in Ukraine as a justification for boosting fossil fuel production.
Compare and contrast: Shell’s shares soar as BP endures rocky journey on London Stock Exchange
Wael Sawan, Shell’s new chief executive, has even described any further radical reductions as “dangerous and irresponsible.”
BP has, instead, tried to present itself as offering the best of both worlds – backing green energy while doing its bread-and-butter production of oil and gas, which has seen the company caught between two stalls.
Simply put, its green investment is nowhere near sufficient yet to win over clean energy investors, no matter how important its transition to renewables is for the sake of the planet.
At the same time, it appears less focused than other oil and gas producers – which is off-putting to fossil fuel backers.
It is also an issue of competency – with Shell maintaining a clear agenda of fiscal prudence under a new boss, which has supported its much higher share price.
By contrast, BP has suffered boardroom disarray with the dramatic exit of its chief executive Bernard Looney combined with its uncertain strategy.
This has fuelled speculation it could be ripe for a takeover following Chevron’s £44bn acquisition of US rival Hess last month, and Exxon’s £48bn snapping up of Pioneer Natural Resources.
Activists targeted Shell’s AGM last year amid pressure on the company to ramp up its climate goals – but Shell’s aim has been to please its shareholders
Oil and gas giants will have to go green
BP’s vulnerability to a takeover also reflects the reality that oil and gas production is a finite industry, despite efforts to prolong production across the sector and hold off straining green commitments as long as possible.
Its smaller size to its rival makes the company a potentially huge prize for mergers and acquisitions as the industry consolidates.
However, while its strategy is muddled and the company finds itself falling behind domestic competitor Shell – BP is not mistaken to be more alert over growing expectation of energy firms to meet net zero pledges.
While shareholders bask in buybacks and dividends from energy giants eager to sate them and stave off fears over easing commodities rallies, over time they will have to answer to government pressure and industry calls for a greener agenda as net zero targets loom.
This includes everything from spending on renewables projects such as offshore wind and hydrogen, to repurposing legacy infrastructure for carbon capture to showing significant cuts in emissions.
BP may have struggled, but other energy giants will have to try the same transition with their own companies towards a more climate-friendly position.
How energy giants manage this shift while keeping shareholders onside will be fascinating to see.
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