Big Oil is Back in Style

Over the last few weeks, the Big Oil majors reported a series of record profits for 2022. This is not surprising after a longer string of quarterly earnings reports as oil and gas prices have soared for much of the year. What was surprising was the apparent change in investor sentiment towards their industry.

Energy industry vet and market analyst David Blackmon last week noted in a podcast that US oil companies have consistently outperformed their European counterparts thanks to their greater focus on their core business. Meanwhile, their European counterparts are seeking to respond to certain shareholder expectations of a transition that aligns with the larger government-led transition to low-carbon energy.

Of course, pressure from governments and activist groups is much stronger on European oil companies than on American companies, but when it comes to share prices, it’s usually pragmatism that steers investors.

It is this pragmatism that accounts for the discrepancy between major US and European oil valuations, according to Bloomberg. It is this pragmatism that is now rewarding European Big Oil with a higher market cap, following their record 2022. And this pragmatism comes as Europeans change their minds with regards to their transition plans.

Europe’s three largest oil and gas companies—BP, Shell and TotalEnergies—all announced plans that involved some sort of return to their core businesses and an easing of their transition plans. Movement is smooth, far from turning, but clear enough.

BP said it will continue to work to reduce its emissions footprint by cutting oil and gas production, but revising its target of reducing this production by as much as 25 percent. The initial target was to reduce production by 40 percent from 2019 by 2030.

Related: Climate Crisis Wave Turns For Big Oil

Shells are planning to abandon its investments in renewables where they are and spend more to expand gas operations. “Our philosophy has been a real pivot toward investing in the energy transition,” said new CEO Wael Sawan. “But we’re going to make sure that those investments go into areas where we can see a line of sight to attractive returns to be able to reward our shareholders.”

TotalEnergy, meanwhile, will focus in liquefied natural gas after a stellar year for the commodity amid the European energy crisis that started in fall 2021 but progressed in 2022. CEO Patrick Pouyanne named LNG a pillar of TotalEnergies’ future growth.

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 shift may seem odd at first. But the stock performance of all three tells a different story.

This is a story about an investor who buys a company not because of its transition plan but because of its shareholder return plan. This is a story of a reality check that overrides the shareholder resolutions that environmental activists use with the means to build large stakeholdings in Big Oil companies as a tool to pressure these companies to essentially give up the businesses that make them big.

The share price tells the story: shares of BP, Shell and TotalEnergies all rose after they reported their 2022 results and future plans. That jump is specifically marked for BP. It could be due to the supermajor’s revised production cut plans. After years of divergence, the European and American supermajor ratings are moving in the same direction as their strategies are aligning.

Of course, not everyone is happy about this. Climate change activists certainly don’t. As the Bloomberg report notes, even a short-term refocus on climate outcomes can undermine climate change mitigation efforts.

But the Big Oil companies or any company are not really activists. They are not in the business of mitigating climate change, even if their net-zero plan states this as their ultimate goal. Like every other company, Big Oil is in business to generate profits from the sale of products and services and share them with their owners—also known as shareholders.

It is this simple truth that drives company decisions about spending and production growth or de-growth. It’s the most basic rule of economics, and it’s the rule of supply and demand. As former Shell chief executive Ben van Beurden once said, while the world needs oil, we will continue to supply it with oil.

Another fairly simple truth that is driving the big oil companies to backtrack on their transitional paths may be the subpar performance of low-carbon energy these days. Cost inflation, component failures and trade tensions with China, the undisputed leader in the manufacturing segment of the renewable energy industry, have all combined to drive profits from these ventures lower.

Government subsidies seem insufficient to motivate Big Oil to stay on that path without even looking at the alternative route to the net-zero future it promises.

By Irina Slav for Oilprice.com

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