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The majors' messy divide

Two gassy Europeans, two shale-obsessed Americans and one in between is too simplistic a division

It remains true that there are striking similarities between the five largest oil majors' strategies—focus on value over volume growth, lower production costs and high grading of portfolios through asset divestment, capital discipline and a commitment to shareholder value. But the shorthand for how to separate them may be less apposite.

The received wisdom is that you can split the firms into the two firmly European majors, Shell and Total, which have bet significantly on LNG and got firmly on board with various energy transition technologies. The two US heavyweights, ExxonMobil and Chevron, have retrenched to international mega-projects and a domestic shale oil core. BP, with its British roots and its turn-of-the-century acquisition of two Standard Oil spin-offs, Arco and Amoco, is seen as sitting somewhere in-between.

Based on a breakdown of the main subjects of questions asked by analysts when the five firms presented second quarter results in late July and early August, there appears to be some truth to the generalisation, but the data also shows divergence from a clear picture.

Despite the firms' collective downplaying of production growth, perhaps unsurprising given the raft of underwhelming single-digit growth or flat performance reported, the upstream sector remains analysts' largest area of interest, with 34 questions across the five conference calls, over 27pc of the total asked.

And the distribution across the majors was largely in line with perceptions of where the firms sit, with Chevron attracting 12 questions, mainly focused on its activities in the Permian, ExxonMobil eight and BP six. Shell and Total, which have largely split their gas activities out of their upstream divisions, attracted just four questions each.

Focus on gas

On gas and LNG, in contrast, the two Europeans were comfortably out in front, albeit it was a 'victory' they may not have celebrated. Total attracted a full 10 questions, many of them focused on their Mozambique LNG acquisition from US independent Occidental, and Shell five.

$7bn — investment in Lightsource BP

The attention of a number of them was the impact of very low prices on the bottom line. Both firms were largely able to bat the queries away on the grounds that most of their LNG remains linked to oil prices. But, amid ever increasing LNG buyer disquiet about the disconnect between the two, and growing prominence for regional gas benchmarks, it feels as if the days of this comfort blanket must be numbered.

Chevron, as it continues to ramp up its large Australian liquefaction projects, fielded three questions on gas and LNG and ExxonMobil two, albeit one on its shrinking European pipeline gas business. While 20 questions on gas and LNG made it the two most popular topics overall, BP was asked no questions specifically on the subject.

The firm has a long-standing commitment to growing the gas element of its business, and its LNG trading team was a pioneer of portfolio optimisation that delivered huge profits from the late '00s. But it lacks a compelling future LNG story at present, which may be worth monitoring to see if the firm dips into the M&A market, either on a project or corporate level.

Source: Company information, Petroleum Economist research

Breaking new ground

The energy transition is another aspect of the majors' businesses where BP does not sit comfortably within a trans-Atlantic divide. Few of its peers faced questioning on their initiatives in the area, with a single enquiry thrown in the direction of Shell and Chevron. None to ExxonMobil is unsurprisingly, to Total perhaps more so.

BP received six questions focused on its approach to non-fossil fuel activities and about the energy transition generally. Jason Kenney, head of oil and gas equity research at Spanish bank Santander, asked directly if there was "disproportionate pressure on BP currently around climate change and climate consciousness relative to other international oil companies at this time", to which CEO Bob Dudley replied that he "think[s] it feels a little bit that way".

Dudley cited BP's headquarters in London, the "epicentre for climate demonstrations", as a factor in the focus on the firm, and stresses that it is "happy to engage" and does not mind either demonstrations or dialogue. But he warned against "demonisation" of companies and "polarisation", noting the "irony" that the UK is seen globally as a climate change leader due to its phaseout of coal-fired power. He reserved particular criticism for those arguing for a move directly to renewables and not through gas as "not really helping the debate".

BP has found a potential solution to the conundrum where some investors criticise any capital allocation to potentially lower-margin non-hydrocarbon businesses, while others point out that majors talk up their commitment to transition technologies but devote so little of their capex to them that they will never grow into significant strands of the firm.

In contrast to a previous approach where BP moved into areas such as renewable generation through 100pc subsidiaries, the company now trumpets a hybrid approach—committing capital with a view to selling down its stake, entering into joint ventures such as its recent tie-up with Brazilian biofuels producer Bunge or providing 'seed capital' that attracts other investors.

The upstream sector remains analysts' largest area of interest

The firm cites its Lightsource BP solar business as an example of the latter, with BP investing $200mn in 2018 in the entirely UK-focused business, which has since attracted $7bn in capital from other investors and expanded its footprint to 10 countries.

Chemical attraction

Other traditional parts of the integrated business model, such as refining and marketing trading, attracted limited attention, with the former eliciting at least one but no more than three questions across all five firms, but only 10, or 8pc of all asked, overall. The latter was an even less popular topic, being the primary focus of just three enquiries.

Chemicals were also top of few analysts' agendas, with just seven questions, but over half of these were directed to ExxonMobil. It remains a truism that an ExxonMobil results presentation feels materially different to its peers, with a laser focus on technological advantage, whether through the industrialisation of Permian production or premium output from refineries or petrochemical facilities through differentiated in-house innovation.

Given the majors' focus on the importance of the balance sheet, it is unsurprising that queries around capex, cashflow, gearing and return on investment were popular, with 18 questions on the subject, as well as eight on interlinked topics such as dividends and buybacks, and six on divestments. For the latter, the refrain was familiar—all have ambitious targets, all are behind schedule, all insist appetite for the assets is good and to expect progress soon. Although some are introducing more cautious statements about prices realised, timeframes slipping or goals only partially met.

BP attracted half of the questions focused on divestments, as well as topped the ranking, jointly with Total, on dividends and buybacks queries, often with a link between the two. But the firm was bullish on its "well-oiled machine" getting four or five deals done, as well as the potential to increase dividends later in the year.

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