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Can Oil Firms Win Over ESG Investors?

Can Oil Firms Win Over ESG Investors?

As institutional investors grow increasingly…

Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Can Big Oil Surprise This Earnings Season?

Rising oil benchmarks and rebounding share prices: two things Big Oil majors had all but forgotten last year. Yet helped by OPEC+ and Big Pharma, the world’s largest oil companies are beginning to remember what it felt like to have some ground under their feet. This week Big Oil begins reporting fourth-quarter and full-year 2020 results. Here’s what we can reasonably expect.

The Year of Writedowns

If 2020 had to be named by Big Oil, it might well be named The Year of the Writedowns. Big Oil wrote down tens of billions of dollars worth of assets as they become unprofitable amid the historical demand slump that the coronavirus pandemic brought about. BP alone calculated its writedowns at up to $17.5 billion. Even Exxon, which resisted writedowns until the last possible moment, said last November it would book writedowns of between $17 and $20 billion in its fourth-quarter report.

But these writedowns have already been factored in by the market, so whatever the majors report, it shouldn’t have too big a negative effect on their share prices. These, by the way, have been recovering nicely on Covid-19 vaccine developments and continuing OPEC+ cuts, but they are still not the go-to stocks they once were. And they may never again become go-to stocks, at least for a while.

The Renewables Pivot

Besides writedowns, the other theme of 2020 was the pivot of European Big Oil towards renewable energy. All Big Oil majors—again, even Exxon—have emission cutting targets for the medium and long term. Yet some are more ambitious than others in these targets and are practically pledging to stop being Big Oil. When these plans were first floated, shareholders reacted warily: BP’s stock price dropped when CEO Bernard Looney announced his net-zero plans for 2050. Yet BP and its fellow supermajors may well be banking on a new breed of investors: the ESG crowd, who will want to hear more about these net-zero plans. Related: The Surprising Rise And Fall Of A Shale Superstar

The Second Cost Cut Era

As oil prices tanked last year under the weight of the pandemic, Big Oil took to cost cuts and spending revisions to respond to the crisis. Spending plans are still cautious and likely to remain so until the world returns to some semblance of normality, which banks expect to happen later this year. Yet some supermajors may still surprise with plans for this year if they feel bold enough with Brent above $50 a barrel.

Investors are likely to watch cost updates and spending plans closely this reporting season as they have “largely given up on rewarding companies for boosting output, expanding underground reserves or timely project construction,” Bloomberg’s Kevin Crowley and Laura Hurst wrote in a recent piece on Big Oil Q4 earnings and what to expect from it. Investors will also watch cash flows as the one single indicator for the companies health as reflected in stock price performance, according to Morgan Stanley analysts cited in the Bloomberg article.

A Complete Makeover

Emission-cutting plans will be in the spotlight this earnings season, as they are in every industry now that the world seems set on a quest to reduce its carbon footprint. Diversification into new business areas—the greener the better—could boost stock prices further if done right.

At the same time, asset streamlining and inorganic growth in Big Oil’s key business areas pf oil and gas production and processing will also be important. After all, not all Big Oil shareholders are the ESG type, and despite the rise of activist groups set up specifically to pressure big polluters into a cleaner direction, there are many who hold Big Oil because they believe oil and gas will continue to be essential for our life on the planet for decades to come.

Chevron kicks off earnings season on Friday, followed by Exxon and BP next Tuesday, Shell on Thursday, and Total on February 9.

By Irina Slav for Oilprice.com

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