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Can Europe’s oil groups win back investors?

European oil stocks have been battered this year, with the pandemic-induced price crash adding to companies’ existing challenges of reversing historical underperformance while navigating the tricky transition to cleaner fuels.

Faced with this “triple whammy”, as Royal Dutch Shell’s Ben van Beurden has called it, the crisis-hit sector’s battle to win back investors has become much tougher.

“What is it going to take for investors to take that leap of faith?” said Luke Parker at consultancy WoodMackenzie. “These companies are all on a journey and they need to strike the right balance between their traditional businesses and new ones. Can they bring investors along with them?”

While the region’s oil majors have set out their goals to achieve net-zero emissions and shift towards cleaner forms of energy, their ambitions are yet to be matched with investment. As their share prices have dropped this year — notwithstanding a bounce after recent vaccine developments — specialist renewable energy stocks have surged.

Colin Baines, investment engagement manager at Friends Provident Foundation, said “to be taken seriously and receive a ‘climate premium’,” the European majors “need to adopt meaningful low-carbon transition plans”.

“Whilst they have done more than their US counterparts, none are transitioning away from oil in any meaningful sense . . . capital expenditure is still overwhelmingly in oil and gas,” he added.

Behind this is the realisation that even if oil executives manage to transform their businesses, they cannot guarantee significant earnings and returns in the next decade.

Despite new climate pledges, companies from Shell and BP to Italy’s Eni and France’s Total used the most recent earnings season to emphasise shareholder handouts and improvements in their hydrocarbon businesses as they reiterated their focus on lowering costs and more disciplined capital spending.

BP chief executive Bernard Looney, who in August said the company would cut oil production 40 per cent by 2030 and increase low-carbon investment 10-fold by 2030, tried to convince investors the company was focused above all else on “value creation”. He said: “This is not about altruism or charity.”

Eni and Total said they would defend investor returns, while Shell — after slashing its payout in April for the first time since the second world war — announced a “new era” of dividend growth.

Mirza Baig, global head of governance and stewardship at Aviva Investors, said this year’s share price falls were “a reflection of the depressed oil price and the shedding of income investors”.

Companies spoke during the most recent quarterly earnings season about divestments of non-core assets and focused on oil and gas businesses that would throw off more cash, while emphasising other parts of the business such as petrol stations that have been overlooked for years.

Even as oil companies say their operational prowess, global reach and industrial knowhow will support their ability to stake a claim over the future energy system, they still have relatively little expertise in the renewables business.

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Some investors and executives believe the sector should stick with what it knows best. One analyst warned that if companies “get woke” they would indeed “go broke”.

Morgan Stanley analysts calculated that per unit of energy produced, renewables require up to five times as much capital expenditure as oil and gas projects.

With finances under pressure in the short and medium term, companies embarking on the long transition are deploying new strategies to convince investors to hang on for the ride.

Anders Opedal, the new chief executive of Norway’s Equinor, said the company would report results in its renewables division separately from the first quarter of 2021.

“This is to increase transparency around how we are building renewables over time and how society and investors can follow how we develop our renewables strategy,” he told the Financial Times.

Spain’s Repsol recently suggested a wind and solar joint venture in Chile could serve as a blueprint for its future renewables business. Chief executive Josu Jon Imaz said “a potential IPO” could be on the cards.

At the same time, oil company executives point to inconsistencies in the positions of some investors.

Equinor, whose share price fall this year of about 17 per cent is a lot less than some peers at more than 40 per cent, is being lauded for being ahead of the game on renewables. But the company, like US oil majors ExxonMobil and Chevron, still plans to increase its oil production in the coming years even as others plan to hold steady or decrease theirs.

Investment houses also are split internally. While some parts of the business are keen to keep investing in oil companies, others will not.

Amanda O’Toole, portfolio manager of the AXA WF Framlington Clean Economy fund, does not hold these stocks because the vast majority of their capital is “tied up in oil”. But she said oil majors were held elsewhere in the business because they have a role to play in the shift to a lower-carbon world. “I don’t think it is time to wash our hands of these players.”

Oil companies are held within some portfolios with environmental, social, and governance considerations but shunned from others, making it difficult to gauge how far companies need to go to placate shareholders.

“Everyone has a different view,” said Iain Pyle, investment director at Aberdeen Standard Investments.

“If a company makes most of its money from generating oil, that’s not usually going to fit,” he added. “But companies that are making positive changes in their business model . . . that deserves some merit.”

Line chart of $/MWh showing The cost of renewable power has fallen rapidly in the past decade

Some shareholders champion the divestment movement but also believe they have a responsibility to stay invested in the world’s biggest corporate polluters to help clean them up.
 
They acknowledge that traditional oil and gas groups will be vital for the energy system for a long time to come.
 
Diandra Soobiah, head of responsible investment at UK pension fund Nest, said big energy companies had an “important role” to play in the energy transition.
 
But investing in oil stocks could become even less attractive for asset managers under the EU’s new green finance rules that from next year will impose tougher disclosure requirements on investors in oil companies.

Some environmental activists and investors, meanwhile, do not believe an oil company can ever be a truly ethical investment, particularly when a string of other options already exist — from Danish offshore wind producer Orsted to Spanish utility Iberdrola.

“Why should I wait around until they can prove they are able to make money from all the cleaner energy stuff?” one asset manager said. “There are plenty of other ways I can generate returns for my clients.”


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