Our Take: Valuation Gap Shouldn’t Dictate Strategy

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European majors are feeling the heat from lagging market capitalizations relative to US peers, but we caution against attempts to draw up strategies with the express purpose of closing the gap. Any significant deferral of transition plans or drastic adjustment to shareholder returns could provide short-term equity bumps, but at the potential expense of long-term prospects — and future valuations.

  • Publicly traded companies have a fiduciary duty to shareholders, but carrying out that duty sometimes means disappointing them short term. Go back a decade to the “pure-play” frenzy that shifted from value-creative calls for smaller integrateds to spin off downstream divisions to more aggressive slice-and-dice restructurings that would have impaired parent companies. Strategic acquisitions and divestitures instead proved the better tool to unlock value.
  • A spinoff of Hess’ Bakken assets, as proposed, would have removed critical cash flows needed to fund enviable developments offshore Guyana. Hess’ shares have doubled over the past decade; the S&P Exploration and Production index has halved. ConocoPhillips is often considered a safe bet for tepid investors burned by US shale; a US-international portfolio split would have prevented the balance afforded by pairing long-lived, low-cost assets like LNG with high-decline, maturing shale. APA (formerly Apache) — which was on the precipice of a US-international split — can instead use vastly improved terms in Egypt to rebuild its dividend even as gas-weighted US onshore positions are sidelined.

  • Maximizing near-term returns to shareholders at any cost is arguably just as fraught as the previously clamored-for restructurings. The top five majors believe current oil and LNG prices are broadly in the “up” phase of the commodity cycle — meaning they must prepare for leaner midcycle and downcycle conditions. The sharp 8% slide BP’s shares took after a $1 billion reduction in share buybacks this quarter speaks strikingly to the valuation risks posed by any inability to pay shareholders what they’ve come to expect; the decline essentially matched what Shell’s shares did in 2020 when it cut its dividend — the “sacred cow” of shareholder distributions — for the first time since World War II. We therefore see prudence in saving leverage levers for rainier days.
  • Ultimately, shareholders want consistent payouts and a continued path for accretive returns. It’s the latter where the European majors are struggling. New energy businesses are not well understood by conventional energy investors, and the jury is out on whether the European majors’ integrated diversified strategies are a value-adding returns machine or blueprint for building clunky conglomerates that have long lost investor favor. Moving jurisdictions won’t change that reality, but consistent execution and fuller transparency have the potential to. Shell CEO Wael Sawan spoke of the need to establish a “track record” with investors, while BP CFO Murray Auchincloss described the valuation gap as an “opportunity” to converge through consistent performance. While patience is required to see this through, we couldn’t agree more.

Corporate Strategy , Equity and Debt Markets, Majors
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