In recent weeks, oil majors have reported a string of record earnings for 2022. This came as no surprise after an even longer string of record quarterly earnings reports as oil and gas prices soared for much of the year. What was surprising was an apparent shift in investor sentiment toward their industry.
Energy industry veterinarian and market analyst David Blackmon noted in a last week podcast that US oil companies have consistently outperformed their European peers thanks to their increased focus on their core businesses. Meanwhile, their European counterparts struggled to meet certain shareholders’ expectations for a transition in line with the larger government-led transition to low-carbon energy.
Certainly the pressure from governments and activist groups on European oil companies is much stronger than on American ones, but when it comes to share prices it is usually pragmatism that guides investors.
It was this pragmatism that led to the divergence between US and European oil company valuations Bloomberg. It is this pragmatism that is now rewarding European oil majors with higher market caps after their record 2022. And that pragmatism was invoked when Europeans changed their minds about their transition plans.
Europe’s three largest oil and gas companies – BP, Shell and TotalEnergies – all announced plans that include some sort of return to their core businesses and an easing of their transition plans. The move is subtle, it’s far from an about-face, but it’s pretty clear.
bp called it would continue to work towards reducing its carbon footprint by curbing oil and gas production, but it has revised its target for those production cuts by up to 25 percent. Its previous goal was a 40 percent power reduction from 2019 to 2030.
See also: Climate Crisis Turns for Big Oil
shell is planning Leaving investments in renewable energies there and spending more on expanding the gas business. “Our philosophy has been a real linchpin for investing in the energy transition,” said new CEO Wael Sawan. “But we will ensure that these investments are directed to areas where we see attractive returns to reward our shareholders.”
TotalEnergy, meanwhile, will be focus on LNG after a stellar year for this commodity amid the European energy crisis that started in the fall of 2021 but thrived in 2022. CEO Patrick Pouyanne identified LNG as a pillar of TotalEnergies growth going forward.
Given the efforts these companies have made in recent years to make themselves more attractive to investors by demonstrating their determination to move beyond fossil fuels, such a switch might seem odd at first. But the stock performance of all three tells a different story.
It’s the story of investors who buy into a company not because of the transition plans, but because of the shareholder returns plans. It’s the story of a reality check that overrides shareholder resolutions used by environmental activists to build large stakes in big oil companies to pressure those companies into essentially going out of business that made them great.
Share prices tell the story: shares of BP, Shell and TotalEnergies all rose after reporting on their performance for 2022 and future plans. The jump was particularly significant for BP. It could be due to the Supermajor’s revised production cut plans. After years of divergence, European and American supermajor valuations are moving in the same direction as their strategies realign.
Of course, not everyone is happy with that. Climate protection activists are certainly not. As the Bloomberg report noted, even a short-term rebias to yield on climate could be detrimental to efforts to mitigate climate change.
But big oil companies or any other corporation are really not activists. They don’t care about mitigating climate change, even though their professed net-zero plans have that as their ultimate goal. Like any other company, Big Oil is in the business of making profits from the sale of products and services and sharing them with its owners – also called shareholders.
It’s this simple truth that drives corporate decisions about spending and output growth, or degrowth. It’s the most basic rule of economics, and that’s the rule of supply and demand. As Shell’s former CEO Ben van Beurden once said, while the world needs oil, we will continue to provide it with oil.
The other fairly simple truth that caused the oil majors to step back from their transition path may have been the recent underperformance of low-carbon energy. Cost inflation, component failures and trade tensions with China, the undisputed leader in the manufacturing segment of the renewable energy industry, have all caused these ventures’ returns to fall.
Government subsidies don’t seem to have 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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