Big Oil’s track record muddies green makeover

Big Oil’s track record muddies green makeover
Oil firms face a battle with big utilities to compete for a small pool of renewable energy assets, as valuations rise and fossil fuel prices suffer. (Shutterstock)
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Updated 02 September 2020

Big Oil’s track record muddies green makeover

Big Oil’s track record muddies green makeover
  • Debts, uncertain price outlooks and poor deal history make investors wary

LONDON: As major oil companies prepare to spend billions on renewable energy assets for a low-carbon future, the industry’s patchy track record on takeovers is a red flag for some investors.

Ten years ago, the world’s top energy companies were spending billions on major oil and gas assets and costly drilling programs in remote parts of the world.

Fast forward through an oil price crash in 2014 followed by the the coronavirus disease (COVID-19) pandemic this year and some big oil companies are counting the cost of the spending spree — as are their shareholders.

When Shell bought BG Group for $54 billion in 2016 in the midst of the price crash, CEO Ben van Beurden made a compelling case to investors: The deal would support Shell’s dividend under almost any imaginable oil price scenario.

Four years later, with the world gripped by a pandemic, the Anglo-Dutch company has slashed its dividend for the first time since the Second World War and suspended what was the world’s biggest share buyback program.

For investors, the deal crowned a decade of disappointing takeovers, from Exxon Mobil’s $30 billion acquisition of North American natural gas producer XTO in 2009 to Repsol’s $8.3 billion takeover of Canada’s Talisman Energy just months before the 2014 crash to Occidental Petroleum’s ill-timed $38 billion bet on shale producer Anadarko last year.

Now, with European policymakers cracking down on greenhouse gas emissions, the region’s major oil companies have promised to reinvent themselves as low-carbon, clean energy suppliers.

To hit their goals in time, though, they will have to chase a relatively small pool of renewable energy assets in competition with big utility companies at a time valuations are going through the roof.

And some investors worry that history will repeat itself.

“The majors have been poor capital allocators for the better part of the past 20 years,” said Chris Duncan, an analyst at Brandes Investment Partners which has shares in several European oil firms. “I’m nervous ... usually when companies transition to a different market the transition is not a profitable process.”

BP and Total will present details about their new strategies to investors this month. Repsol will hold its strategy day in November and Shell’s will be in February.

The collapse in oil prices since COVID-19 struck has also forced the big companies to wipe billions off the value of their assets, and has also hit revenue to the point they’ve taken on more debt to keep up payments to shareholders.

Shell, for example, cut $16.8 billion off the value of its assets, which included a big chunk of the flagship QCLNG liquefied natural gas (LNG) plant in Australia it acquired through the BG deal.

Shell has slashed its dividend for the first time since the Second World War, and suspended its share buyback program — the biggest in the world. (AFP)

All told, the world’s top energy companies have booked asset writedowns totalling $60 billion this year following the slide in oil prices and demand during the coronavirus pandemic.

And since 2005, the combined debt of the top five global oil majors, which include Shell, BP and Total, has risen five fold to $370 billion. That means much of the cash they will generate in the coming years will probably go toward cutting debt.

If oil companies chase renewable assets such as wind, solar and hydro, which generally have lower returns than oil and gas — or invest in green projects from scratch — they’ll be starting from an already highly leveraged position.

Some analysts said that with record debts, an uncertain outlook for prices and a weak deal-making record, big oil companies face a tough task enticing investors.

“The European majors in particular will have to earn the right to invest more in renewables, and convince investors they will not make the same mistakes again, and again,” said RBC Capital Markets analyst Biraj Borkhataria.

“When Shell acquired BG Group, a key quote from Shell’s CEO stuck with us: ‘Bold, strategic moves shape our industry’. Unfortunately, many of the ‘bold’ moves from management teams in recent years have proven to destroy value over the long term for shareholders,” he said.

Speaking in July, Shell’s CEO stood by the deal. “The company did get stronger, but indeed the company was not able to withstand the onslaught of COVID-19 if we wanted to adopt a prudent stance ... I remain convinced it was the right move,” van Beurden told reporters.

Three current and former BG and Shell executives interviewed by Reuters, however, believe the deal was overvalued at the time due to bullish oil and gas price forecasts.

Big oil companies have historically attracted investors with a promise of large and steady dividends. But the sector has had a poor track record from shareholders’ perspective of late.

Over the past five years, Shell’s total shareholder returns stood at minus 2.9 percent.

The picture is similar for others including BP, Exxon Mobil and Total. In addition to Shell, BP and Equinor have also cut dividends and suspended share buybacks.

BP’s total shareholder return, which assumes dividends are reinvested in its shares, is just 1.4 percent since 2015, while for Exxon it was minus 7.3 percent, the weakest in the sector.

Chevron had the strongest total returns at 5.9 percent.

By comparison, returns from Apple shares over the past five years are above 40 percent while Google’s Alphabet shares have returned more than 15 percent.

The steady drop in the value of oil companies — BP’s market capitalization has halved over the past two years to about $75 billion, for example – might also make it harder for them to land large acquisitions of renewable assets or power companies which have seen they shares surge in recent years.

Shares in Danish renewables power firm Orsted, for example, have more than doubled over the past two years, giving it a market capitalization of about $45 billion.

Shares in Spanish utility Iberdrola, one of the world’s biggest renewable power companies, have jumped 180 percent in two years to give it a market value above $80 billion.

Valuations of companies such as Orsted could also rise as many of Europe’s top oil and gas companies compete to expand their low-carbon businesses fast.

Still, some investors said that as the European oil companies evolve into low-carbon businesses, they might attract a different kind of investor more interested in long-term stability than bumper shareholder payouts year after year.

“Traditional oil and gas investors are fond of the high returns and, until recently, the outsized dividends associated with the sector.” said Alasdair McKinnon, portfolio manager at The Scottish Investment Trust.

“However, this shift may attract a different set of investors who look at the prospectively lower returns on offer from renewables with a less jaundiced eye.”

Careem welcomes Saudization of ride-hailing sector, eyes further investment

Careem welcomes Saudization of ride-hailing sector, eyes further investment
Updated 53 min 33 sec ago

Careem welcomes Saudization of ride-hailing sector, eyes further investment

Careem welcomes Saudization of ride-hailing sector, eyes further investment
  • Careem said the company had been affected by the pandemic because workers stayed at home and cut down on their travel

DUBAI: Ride-hailing service Careem has welcomed a government decision to fully localize the sector in the Kingdom, saying the move will help to create more jobs for Saudi drivers.

The Saudi Ministry of Transport said the new rule would have limited impact as citizens already made up 96 percent of the workforce in the ride-hailing sector.

“We are proud that over 100,000 Saudi nationals are finding income-earning opportunities with Careem each month,” a Careem spokesperson told Arab News. “We’ve worked hand-in-hand with the Transport General Authority and Ministry of Human Resources and Social Development to help the Kingdom achieve its ambitious agenda, and applaud the efforts the government is making to support Saudis working in the ride-hailing sector.”

The spokesperson added that Careem planned to continue investing in the Kingdom with a greater range of transportation and delivery services. 

Although Careem did not give specific numbers for its operations in Saudi Arabia, it said it had 33 million registered users in 13 countries across the region and operated in 28 Saudi cities.

Ibrahim Manna, managing director of global markets at Careem, said the company had been affected by the pandemic because workers stayed at home and cut down on their travel.

“COVID-19 has impacted our ride-hailing, starting in March,” he told Arab News. “This is a natural result of lockdowns, curfews and other limitations of movement, changing user behavior and habits in daily life.”

But while the ride-hailing service decreased, food delivery demand soared.

“Delivery was one of the big growth levers,” he added. “Due to the change in the daily lives and needs of the customer, we adapted quickly and provided them with what they needed most. We partnered up with many stores, pharmacies and restaurants, in order to deliver essentials to citizens in Saudi Arabia during a difficult time.”

On Thursday Mueed Al Saeed, assisting vice president of Land Transport Regulation of the Public Transport Authority, said there were 16 companies including Careem licensed to operate ride-hailing services in the Kingdom.

He also said 300 million trips had been carried out during the past three years, and that there were 250,000 drivers actively working for these services.