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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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Are Big Oil’s Renewable Investments Paying Off?

The world’s largest oil companies reported solid earnings and strong cash flow generation for the first quarter. But all those profits had very little to do with the pledges from Europe’s major oil firms to boost investment in renewables and work more for low-carbon energy solutions to reach net-zero emissions by 2050.  

The main driver of the higher earnings—in Exxon’s case a return to earnings after four consecutive quarters of losses—was the recovery of oil prices during the first quarter this year.

All supermajors benefited much more from the rising oil and gas prices and profitable oil and gas trading than from their investments in renewable energy.

If anyone at all had expected a pivot to renewables to start bringing in loads of cash for Big Oil less than a year after all the pledges for net-zero emissions and increased investment in low-carbon energy, they haven’t been paying attention to the top oil executives who have repeatedly said that the renewables business will not have the same return on investment as the ones from oil and gas—at least not in the short and medium term.

Sure, in the Q1 communications to the market, the supermajors in Europe doubled down on their commitments to invest increasing amounts of money into renewables and monetize renewable energy assets. But it is cash from oil and gas operations that is a key source of their investments in low-carbon energy. Related: Three Things That Will Drive Oil Prices In May

“Performing while transforming” – this is what BP’s chief executive officer Bernard Looney reiterates in every update to the market. In other words, strong cash generation in Q1, thanks to the higher oil prices, allows BP to continue transforming for a future in which its oil and gas production will have dropped by 40 percent in ten years.

BP is resuming share buybacks this quarter after more than tripling its first-quarter earnings from a year ago on the back of rising oil prices and “exceptional gas marketing and trading performance,” it said last week. Shell reported a surge in adjusted earnings for the first quarter and lifted its dividend by 4 percent as higher oil and gas prices and demand drove profits higher.

Shell and BP are not yet reporting renewables division earnings as a separate item, but some European majors have started doing so. Total, Eni, and Equinor already have a separate item for the contribution of renewables to the core earnings, although renewables are in some cases paired with the power divisions.

These new reporting approaches aim to show investors that renewables will be of growing strategic importance to the European oil majors. But they also show that Big Oil needs a lot more “performing” from the core oil and gas assets in order to achieve the “transforming” of the energy business and return on investment in the renewables divisions.

For example, Total said its adjusted net income of $3 billion for Q1 exceeded its earnings from the pre-crisis Q1 2019, thanks to higher oil and gas prices and the strategy to grow LNG and renewables. Yet, earnings before interest, tax, depreciation, and amortization (EBITDA) on its renewable business were just US$148 million out of more than $7 billion total EBITDA. Related: China Snubs U.S. With Huge Iraqi Gas Deal

Norway’s Equinor started reporting renewables as a separate reporting segment and reported massive adjusted earnings from that division of $1.34 billion for Q1, up from just $13 million for Q1 2020, thanks to a $1.4-billion capital gain from welcoming BP as a shareholder in its U.S. offshore wind projects and Italy’s Eni as a minority shareholder in the Dogger Bank project offshore the UK.

Equinor’s major gain from renewables was from farming down interests and welcoming other major corporations with predominantly oil and gas businesses to offshore wind developments.

So international oil majors are moving into more renewables businesses, but they are looking to spread risks and monetize the assets.

Power and renewables at Italy’s Eni earned US$243 million (202 million euro) to contribute to the adjusted operating profit, while the exploration and production division contributed as much as US$1.66 billion (1.38 billion euro). Eni is also considering either listing or selling a minority stake in the new division that includes the renewables business, “to extrapolate the maximum value from this new entity during the course of 2022.”

Fitch Ratings does not see for Eni “a meaningful contribution to cash flows from the renewables business in the medium term,” it said on Friday. 

Overall, analysts do not expect renewables to generate massive cash flows and profits for Big Oil over the next few years. Until renewables start contributing meaningfully to the bottom line and cash flows, it will be oil and gas profits that will finance the low-carbon energy push of the major oil companies.  

By Tsvetana Paraskova for Oilprice.com

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