Earnings for the Western majors in the first quarter were mixed in terms of meeting lofty analyst expectations, but the group still collectively posted its second-highest adjusted earnings of the mega-merger era. Capital discipline has framed the conversation as companies remain mindful of the potential erosion of returns due to rising costs and the likely decline in oil and gas prices over time. Here are Energy Intelligence’s key takeaways from the results.
- The majors still lack the line of sight to achieve a clean break with Russia.
The major majors took nearly $35.8 billion in after-tax write-downs against first-quarter earnings in response to the investment suspension and — with the exception of TotalEnergies — Russian exit plans. But their woes in Russia are barely in the rearview mirror.
Exxon Mobil gave no word on when it will cease operatorship at Sakhalin-1, a project that accounted for nearly 2% of 2021 production and 1% of operating profit. BP management is reportedly not questioning whether price alone or other strategic considerations will inform the planned sale process for its 19.75% stake in Russian state-controlled Rosneft. Unable to reasonably estimate the value of the stake, the British major carried out a full write-down of the book value. Shell said it hoped to exit Sakhalin-2 completely “soon”, but could not give details.
The opacity of the schedule appears to reflect a desire to preserve some value in these assets, with gradual and orderly reductions preferred to overnight exits. Divestments are in any case unlikely in the short term given the constantly evolving sanctions and counter-sanctions that complicate financial exchanges.
Leadership teams spoke more clearly about the larger strategic goals remaining intact. Total has insisted that it does not expect any “disruption” to its LNG growth profile. More details are promised soon, but he pointed to debottlenecking and accelerating Cameron LNG’s expansion plans in the United States and a restart subject to a ceasefire of Yemen LNG as options to replace the Russian investments lost in LNG. BP had to lower its Ebitda targets for 2025 and 2030 by around $2 billion with the loss of Rosneft. But he insists his framework around distributions, capital investments and returns is valid for the remaining underlying businesses.
Perhaps ironically, Chevron, which has no direct upstream exposure to Russia, is on the lookout for lingering fallout for its strategically important — and growing — base of crude from neighboring Kazakhstan. The US major says this Kazakh crude, exported from Russia’s Black Sea port of Novorossiysk, is selling at discounts of around $7-8 a barrel to dated Brent from around $1 before the invasion – and that it is too early to know how big the discounts could 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 due to continued underinvestment. Permanent losses of Russian volumes will only worsen the potential deficit.
And yet the majors were quick to warn of expecting over $110/bbl of crude, over $20 per million Btu of global gas and historic refining margins as the new standard. Long-time energy bull Exxon has repeatedly spoken of market uncertainties while saying 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 this side of the pandemic to provide financial flexibility in the 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, promoting a cooling once geopolitical tensions ease. “One of the lessons of history is that bad times don’t last forever, nor do times when prices are strong, and so we can’t begin to believe they’ll always be like this,” he said. he declared.
Total CEO Patrick Pouyanne has stressed 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 point climb to $100 /bbl in 2014. Pouyanne, like his peers, reiterated existing medium-term investment plans this time around.
- Cost inflation will make investment discipline even more critical in low-margin renewables.
Commodity price inflation is hitting renewable electricity supply chains as well as oil and gas — but the former lack the compensation of an additional $110 per barrel of oil equivalent price to dampen returns. None of the European majors revised their medium-term capacity growth targets in response, but all insisted that preserving yields was the main objective.
“Obviously we want to develop it, but we don’t want to develop it at any cost,” BP CEO Bernard Looney said of the major’s offshore wind portfolio. Under new low-carbon gas and power chief Anja-Isabel Dotzenrath, BP hit more than 3 gigawatts of its “hopper” of renewable energies to keep a grip on the promised yields of 8% to 10%. This pool of pre-pipeline projects rises and falls as developments are promoted or abandoned, but BP has acknowledged that inflation and fierce competition pose a challenge. “We recently bid in … a licensing round in the United States and were unsuccessful. I hope you take this as a sign of discipline,” Looney said.
Total reminded investors that it has rarely won renewable energy tenders in the coveted Middle East due to ultra-aggressive bids made by others that assume technology-related cost deflation. Pouyanne suggested that Total’s conservatism comes here despite strong prospects for future electricity prices, which it plans to exploit to earn higher rates of return. Additionally, Total is less optimistic about green hydrogen in Europe than some others, citing limited return potential given the high electricity costs expected for the continent.
- Buyouts remain the flywheel of choice, even if imperfect.
Share prices of the majors continue to climb this year despite downward pressure in broader equity markets. Rising stock prices are reducing the buying power of stock buyback programs, but the majors continue to pump more dollars into buybacks in what is seen as the safest use of money.
Cost inflation and strong messages from investors are keeping capital spending at bay, while majors are loath to drive dividends too high too quickly and risk future cuts. Debt repayment and cash building also continue. But with money coming in faster than it can be spent, stock buybacks offer a flexible sweetener for investors.
| Majors Upsize Stock Buybacks | |
| BP | Added $2.5 billion to buyback program in Q2 |
| Chevron | Increase redemption cadence from $5 billion to $10 billion a year, the high end of its recently expanded lineup |
| Exxon Mobil | Triple its repurchase limit until the end of 2023 to 30 billion dollars |
| Shell | On track to deliver recently increased buyback program of $8.5 billion by second quarter results, potential signaled for higher buybacks in second half |
| TotalEnergies | Added $1 billion to first-half buyback program |
| Source: Company earnings calls, press releases | |
Exxon is reverting to its status as the king of Big Oil buyouts, with its potential to buy up to $30 billion worth of stock by the end of 2023, while Chevron is buying back stock at a faster rate than ever before. any time in its history. Shell’s program already comes up against the technical limits of shares it can buy over a given period. The UK-based supermajor is giving shareholders at its annual general meeting on May 24 the chance to approve a resolution that would allow an off-market buyout to expand the pool of shares it can sweep.