Majors See Scope for More M&A as Windfall Continues

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Western majors’ third-quarter earnings suffered a slight sequential dip overall but still beat analysts’ expectations as the five companies — BP, Chevron, Exxon Mobil, Shell and TotalEnergies — racked up combined adjusted profits of around $57 billion. Earnings calls focused on the majors' priorities for their surplus cash amid energy security concerns, which could include more M&A. Here are Energy Intelligence's main takeaways.

  • Majors could divert more free cash flow to acquisitions.

Given the current emphasis on near-term oil and gas supplies and low-carbon growth, companies may decide to keep more cash on their balance sheets, which should allow for greater countercyclical M&A activity in time. Total is utilizing strong cash-flow generation to accelerate its transition. The company last month announced an initial $550 million deal to form a joint venture with Brazilian wind farm operator Casa dos Ventos and has closed its $2.4 billion acquisition of 50% of US renewables player Clearway Energy. BP’s CFO Murray Auchincloss, meanwhile, said the company would have the capacity to do more M&A next year following its recent $4.1 billion acquisition of US biogas player Archaea Energy.

US majors Exxon and Chevron are both amenable to M&A themselves. Exxon’s Woods suggested any such opportunities would be “selective and strategic” and skewed more toward its traditional oil and gas business than green energy. Chevron boss Mike Wirth noted that there’s “likely” to be some more consolidation in oil and gas since “fewer and stronger” companies are needed. But he said Chevron would be disciplined: “We don't have an open checkbook even when times are good like this, especially when times are good like this.”

  • The case for shareholder distributions is winning out over spending.

The five firms will reward shareholders with roughly $104 billion in share buybacks and dividends in 2022, according to analyst estimates and company guidance. But they are set to reinvest just $87 billion-$102 billion of their windfalls in their core businesses as combined capex this year, having only loosened purse strings slightly amid calls for more oil and gas to ease energy security concerns. Furthermore, the bumper profits are putting companies in the political crosshairs in Europe and the US as governments seek to direct some of the windfall profits to struggling energy consumers. The limited increases in capex suggest the majors have little confidence in either fiscal regimes or political will across geographies, RBC analysts said.

Exxon CEO Darren Woods, whose company posted record earnings of almost $20 billion in the third quarter, expressed concern around the impact of some of the market interventions being pursued. EU plans for a one-off “solidarity” tax on fossil fuel producers’ profits have not yet been finalized. But Woods warned that they would exacerbate the decline in oil and gas output and refining capacity in Europe, “forcing greater reliance on imported energy and fuel products” and harm the continent's prospects of improving energy security.

Windfall taxes have also been a hot topic in the US. The Biden administration was quick to criticize Woods’ implied message that returning $15 billion in dividends to shareholders was akin to giving some of its profits “directly to the American people” considering 40% of its stock is held by retail investors.

  • There was a curious contrast in LNG performance.

One standout from third-quarter earnings was the contrast in performance between top LNG players Shell and Total. The French major’s strong earnings were driven by its LNG business, with average LNG selling prices up more than 50% from the previous quarter. Total noted that strong trading and its integrated strategy allowed it to “capture the full benefits of this LNG price,” taking advantage of price dislocations and the resulting arbitrage. It achieved these results despite a 10% drop in LNG sales volumes due to outages at Freeport LNG and lower equity liquefaction at Nigeria LNG (NLNG) and Ichthys. CFO Jean-Pierre Sbraire noted the “huge” advantage of Total's access to almost 18 million tons of European regasification capacity — roughly 15% of the region’s total. That allowed the company's traders to play the arbitrage between the US and Europe, as the top exporter of US LNG.

By contrast, Shell reported weak LNG trading and marketing results, citing the price dislocations as a disadvantage while regasification constraints reduced “optimization opportunities.” The UK supermajor had to contend with outagees at Prelude floating LNG, lower output from NLNG and the loss of Sakhalin-2 volumes, but still managed to deliver twice as many LNG cargoes into Europe as it normally would in the first nine months of the year. CFO Sinead Gorman admitted some of the company’s hedges did not work out as intended due to a “significant dislocation in historically correlated gas markers.”

There are some “structural” reasons behind the divergence in LNG earnings, according to Kepler Cheuvreux analyst Bertrand Hodee. In a report, he estimated that Total has more long-term LNG offtake than supply commitments. Accordingly, excluding Russia, it is “massively long” on LNG to the tune of 14 million tons, versus Shell’s 4.2 million tons, he wrote, describing Total's exposure as "an ideal situation when spot prices are going through the roof, although hedges may be in place.” Total has around 9.5 million tons of “advantaged” US LNG offtake compared to Shell’s 6.4 million tons and access to nearly four times more European regasification capacity than its UK rival. “Nothing is broken at Shell in the LNG space, but we see TotalEnergies as being better positioned in the current environment,” Hodee wrote.

  • The outlook is bullish but the watchword remains 'discipline.'

The majors will maintain their discipline this year and next amid significant macro volatility across both oil and gas and product markets. BP expects gas prices to remain “elevated and volatile” in the fourth quarter, with the outlook heavily dependent on Russian pipeline flows and the severity of the Northern Hemisphere winter. It also sees oil prices remaining high against the backdrop of low inventory levels, Opec-plus supply cuts, limited production growth and uncertainty around Russian exports.

Majors' Capex Guidance, 2022
CompanyAmount ($ billion)
Exxon Mobil21-24

BP also sees scope for incremental upstream capex next year, depending on supply-chain bottlenecks, with plans to bring more rigs into the lower 48 between the Haynesville and Permian, the US Gulf of Mexico and the North Sea. “It's really the supply chain that's choking activity right now," CFO Auchincloss said. "We won't ramp up if we don't have a secure supply chain at reasonable prices.” Exxon also sees room for incremental Permian capex in 2023. Chevron will go from undershooting its capex this year to the top end of its range next year, marking a 20% increase, Wirth said. Cost inflation will drive some of that, but Chevron also pointed to higher spending in the Permian.

Global refining margins decreased by $10 per barrel from the second quarter to average around $35.50/bbl in July-September, according to BP, and are expected to remain at elevated levels this quarter due to lower oil stocks and EU sanctions on Russian crude and products. Total’s CFO Sbraire concurred with this view, while Chevron’s Wirth said the relatively strong global product demand seen so far this year did not send a “strong signal that a recession is under way or that the economy is significantly slowing.”

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