BP and Shell identify as environmentalists, but what does it mean for investors?
Royal Dutch Shell Plc (LON:RDSB) and BP PLC (LON:BP. have in the early weeks of 2021 added detail to strategies that seek to cut emissions and pour investment into alternative energy and fuel businesses.
BP recently pledged to cut its hydrocarbons business by around 40% over the next ten years and kicked off a US$5bn a year renewables investment programme.
Today, Shell told investors that is oil business is past its peak for production and it will manage a decline of around 1-2% per year.
At the same time, it is committing to investments in renewable energy, electric vehicle charging networks, hydrogen fuels for industry, and a reconfiguration of its refining and chemicals businesses with a new emphasis on processing waste materials.
Hydrocarbon business continues with a focus of “value over volume” and, notably, the messaging around decline is specifically about oil, whereas gas is still very much a part of Shell’s plans – in the medium term at least.
Shell says its ‘customer-first’ strategy is demand-led. Chief executive Ben van Beurden noted that the company “must give customers the products and services they want and need” which now means those that have the lowest environmental impact.
“Whether our customers are motorists, households or businesses, we will use our global scale and trusted brand to grow in markets where demand for cleaner products and services is strongest, delivering more predictable cash flows and generating higher returns,” the Shell boss said.
Shell meanwhile aims to keep shareholders onside with a progressive dividend policy and share buybacks to return 20-30% of cash flow each year.
If shareholders are sold on Shell’s strategy, environmental groups are not.
Mel Evans, head of Greenpeace UK’s oil campaign, said: “Shell’s grotesque ‘customer first’ strategy seeks to blame customers first for climate change.
“Meanwhile Shell, the powerful oil major, brazenly says it will dodge oil production cuts and will simply let output dwindle. Without commitments to reduce absolute emissions by making actual oil production cuts, this new strategy can’t succeed nor can it be taken seriously.”
Shell and BP shareholders
The respective ‘net-zero’ strategies should tick an increasingly important box for the Shell and BP as ESG has become a hot topic, especially among institutional investors and consumer facing pension funds.
In 2020, asset managers like BlackRock put greater importance on ESG (environmental, social and governance) issues.
BlackRock, the world’s largest asset manager, specifically decided to screen its active investments against a series of sustainability measures.
Aside from public relations, social conscience and climate emergency there are also solid business motivations for diversification.
Together the two majors produce around 5mln units of a product that has seen a trading swing everywhere between US$30 and US$61 per unit in the last year.
These are businesses that could benefit from more stable and predictable income, for example the utility like business streams like generating renewable energy and selling electricity to EVs via an expanded charging network.
What it means for other producers
There will likely be opportunities for acquisitive independent producers.
BP has already seen a decade of asset divestments and similarly Shell has notably also exited certain geographies by the deal table.
The North Sea and Nigeria are perhaps decent examples of trends that may emerge as the oil majors move reserves and production from their businesses. In both places a number of small producers and solvent small cap oil and gas firms have been able pick-up assets that quickly delivered meaningful volumes and cash flows.
Timing is perhaps key here, as increasingly companies on the lower rungs of the oil and gas industry are favouring production over exploration. It may prove to be a buyer’s market for the established production assets as they become available.
Whilst there may be opportunities for those looking to buy production, there are possibly fewer deals to do for exploration projects.
At the very least there are fewer names in the contacts book for would be deal makers and, as capital is assigned elsewhere, big ticket partnerships (farm-outs) may continue to be thin on the ground.
A discovery of a major oil project today likely has a lead time of several years before they’re realized into production, and it is becoming increasingly difficult to model quite where the industry will be even in the medium term.
A strong caveat, meanwhile, remains – which is, as Shell itself emphasized, high-quality projects will still be in demand.
High quality most likely reads as either high yield and/or low-cost per barrel, preferably with higher volumes per well, with smaller footprints, and in the vicinity of existing infrastructure.
For Shell in particular, the emphasis is on gas.
Oil demand drives crude prices up
Shell and BP might be reducing their profile in the oil business but the world still demands the black stuff.
Only yesterday, weekly oil market statistics unexpectedly revealed undersupply, in the short term at least. Stockpile data in America had been expected to show a 1mln barrel build (i.e. that there was excess supply) but instead the numbers showed a 6.6mln barrel draw (an excess of demand).
Even if the pair of blue-chip oiler exited the industry altogether, the demand for oil won’t disappear tomorrow.
Crude oil prices have climbed steadily in recent months as the global economy begins to emerge from the disruptions of the pandemic and as vaccines roll-out.
Trading at around US$61 per barrel Brent crude is up nearly 50% since November.
Crude prices are approaching levels that again make an increasing number of oil projects viable, or attractive even.