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Majors Preach Conservatism Despite Bumper Profits

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Western majors' first-quarter earnings were mixed in terms of meeting analysts’ lofty expectations, but the group collectively recorded their second-highest adjusted profits of the megamerger era just the same. Capital discipline framed the conversation, as companies remain mindful of potential returns erosion from rising costs and the likely easing of oil and gas prices over time. Here are Energy Intelligence’s top takeaways from the results.

  • Majors still lack line of sight on getting a clean break with Russia.

The leading majors took nearly $35.8 billion in post-tax impairments against first-quarter earnings in response to suspended investments and — aside from TotalEnergies — plans to exit Russia. But their Russia woes are hardly in the rear-view mirror.

Exxon Mobil offered no word on the timing of its wind-down of operatorship at Sakhalin-1, a project that accounted for nearly 2% of 2021 output and 1% of operating earnings. BP management would not be drawn out on whether price alone or other strategic considerations will inform the expected sales process for its 19.75% stake in Russia's state-controlled Rosneft. Unable to reasonably estimate a value for the stake, the UK major took a full book value write-down. Shell said it hoped to completely exit Sakhalin-2 “soon,” but couldn’t elaborate.

The murkiness in timing seems to reflect a desire to preserve some value in these assets, with phased and orderly wind-downs preferred over fly-by-night exits. Divestments are in any case unlikely in the near-term given the ever-evolving sanctions and countersanctions that complicate financial exchanges.

Management teams spoke more clearly to broader strategic goals remaining intact. Total insisted its does not expect a “disruption” to its LNG growth profile. More details are promised soon, but it flagged debottlenecking and accelerating expansion plans at Cameron LNG in the US and a cease-fire-contingent restart of Yemen LNG as options to replace lost Russian LNG investments. BP had to lower it 2025 and 2030 Ebitda targets by about $2 billion with the loss of Rosneft. But it insists that its framework around distributions, capital investment and returns holds for the remaining underlying business.

Perhaps ironically, Chevron, which does not have direct upstream exposure to Russia, is on watch for lingering fallout for its strategically important — and growing — base of crude from neighboring Kazakhstan. The US major says this Kazakh crude, exported out of the Russian Black Sea port of Novorossiysk, is selling for discounts of around $7-$8 per barrel to dated Brent versus around $1 pre-invasion — and that it’s too soon to know how systemic the discounts might become.

  • No one expects current oil and gas price levels to become the new normal.

Exxon, Total and others expected high oil and gas prices this decade on the back of persistent underinvestment. Permanent losses of Russian volumes will only compound the potential shortfall.

And yet — majors were quick to caution against expecting $110 plus/bbl crude, $20 plus per million Btu global gas and historic refining margins as being the new normal. Longtime energy bull Exxon repeatedly spoke to market uncertainties while arguing that current refining margins are neither sustainable nor good for the global economy. The US supermajor is keen to hold a lot more cash on its balance sheet on this side of the pandemic to ensure financial flexibility through lower parts of the cycle. Chevron CEO Mike Wirth pointed out that a significant amount of oil and gas can be produced at lower prices, supporting a cooling once geopolitical tensions ease. “One of the lessons in history is just as the bad times don't last forever, neither do the times when prices are strong, and so we can't start to believe they'll always be like this,” he said.

Total CEO Patrick Pouyanne emphasized the need to remain “super vigilant” on spending due to inflation risks — risks the French major is well aware of, having seen its own break-even balloon to $100/bbl in 2014. Pouyanne, like his peers, reiterated existing medium-term capital expenditure plans this time around.

  • Cost inflation will make investment discipline even more critical in lower-margin renewables.

Commodity cost inflation is hitting renewable electricity supply chains as well as oil and gas — yet the former lack the offset of $110 plus per barrel of oil equivalent prices to cushion returns. None of the European majors revised medium-term capacity growth targets in response, but all insisted returns preservation was the chief objective.
“We obviously want to grow that, but we don't want to grow it at any cost or at all costs,” BP CEO Bernard Looney said of the major’s offshore wind portfolio. Under the helm of new gas and low-carbon energy head Anja-Isabel Dotzenrath, BP has struck more than 3 gigawatts from its renewables “hopper” to keep a tight grip on promised 8%-10% returns. This pool of pre-pipeline projects ebbs and flows as developments are promoted or scrapped, but BP acknowledged inflation and fierce competition posed a challenge. “We recently bid in … a license round in the United States and were unsuccessful. I hope you take that as a sign of discipline,” Looney said.

Total reminded investors that it has rarely been successful in renewables tenders in the coveted Middle East because of ultra-aggressive bids made by others that assume technology-driven cost deflation. Pouyanne suggested Total's conservatism here comes despite a robust outlook for future power prices, which it plans to leverage into higher rates of return. Moreover, Total is less bullish on green hydrogen in Europe than some others, citing limited returns potential given high expected electricity costs for the continent.

  • Buybacks remain the go-to, if imperfect, spending flywheel of choice.

Majors’ share prices continue to rip higher this year despite downward pressure on wider equity markets. Higher share prices mute the buying power of share repurchase programs, yet the majors continue to pump more dollars into buybacks in what is seen as the safest use of cash.

Cost inflation and strong messaging from investors are keeping capital spending at bay, while majors are loath to drive dividends too high too fast and risk future cuts. Debt repayment and cash building also continue. But with the cash coming in faster than it can be spent, share buybacks offer a flexible sweetener for investors.

Majors Upsize Share Buybacks
BPAdding $2.5 billion to buyback program in Q2
ChevronShifting buyback cadance from $5 billion to $10 billion annually, the top end of its recently upsized range
Exxon MobilTripling its buyback ceiling through end-2023 to $30 billion
ShellOn track to deliver recently upsized $8.5 billion buyback program by Q2 results, flagged potential for higher buybacks in H2
TotalEnergiesAdding $1 billion to H1 buyback program

Exxon is returning to its status as the Big Oil king of buybacks, with its potential to repurchase up to $30 billion in shares by end-2023, while Chevron is buying back shares at a faster clip than at any point in its history. Shell’s program is already butting up against the technical limits of shares it can buy in a given time period. The UK-based supermajor is giving shareholders at its May 24 annual general meeting the opportunity to approve a resolution that would allow for off-market repurchase to expand the pool of shares it can sweep up.

Majors, Earnings, Capital Spending, Equity and Debt Markets, Renewable Electricity , Sanctions
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