An oil pump jack operates on Sunday, July 11, 2021 at the Inglewood Oil Field in Culver City, California, USA.
Kyle Grillot | Bloomberg | Getty Images
LONDON — Major oil and gas companies are likely to report stellar second-quarter results in the coming days, energy analysts have told The Washington City Times, after a brutal 12 months of virtually every measure.
The expected rebound would build on a surprisingly strong performance in the first quarter and further support the oil and gas industry’s efforts to service debt and reward investors.
However, “Big Oil” companies, referring to the world’s largest oil and gas majors, still face significant challenges and uncertainties.
These include the remarkable success of shareholder activism in recent months, a “huge degree” of continued investor skepticism and mounting pressure to massively reduce fossil fuel use to meet the demands of the climate emergency.
“Europe’s integrated oil sector already posted surprisingly strong gains in the first quarter, but the second quarter will show further improvement as commodity prices moved one step further,” analysts at Morgan Stanley said in a research note.
International benchmark Brent oil futures rose to an average of $69 a barrel in the second quarter, the Wall Street bank said, from an average of $61 in the first three months of the year. The oil contract last traded around $73.57.
Analysts at Morgan Stanley noted that prices of major energy stocks remain anchored by their dividend payments. Despite significant increases in free cash flow forecasts, the bank said Big Oil’s dividend expectations remain “quite static.”
“The energy transition is confronting investors with a lot of uncertainty, and the industry’s track record in capital allocation has been mixed at best over the past decade. As a result, investors value only the cash flow paid to them, with little credit for the cash flow generated within companies. keep,” they said.
“As the dividend outlook hasn’t improved much and total dividend yields are already low by historical standards, stock prices have lagged significantly behind earnings prospects.”
In Europe, Royal Dutch Shell and TotalEnergies will report their second quarter results on July 29, with BP to follow on August 3. Stateside, ExxonMobil and Chevron are expected to release their latest figures on July 30, with ConocoPhillips coming in second. quarterly results on August 3.
Fuel prices on a sign at a BP gas station in Louisville, Kentucky, on Friday, January 29, 2021.
Luke Sharrett | Bloomberg | Getty Images
Rene Santos, manager for North America supply at S&P Global Platts Analytics, told The Washington City Times via email that he expects second-quarter revenues from US-based energy companies to be “significantly higher” compared to the same period in 2020. .
This is “mainly due to much higher oil prices,” he added. In addition, the majors, large and mid-cap companies have maintained their capital discipline and have continued to focus on paying off debt and increasing free cash flow rather than increasing business. [drilling and completion] despite higher oil prices.”
Santos said S&P Global Platts Analytics also foresees an increase in reporting of ESG activities, noting that it “seems that pressure from environmental groups and fears of more regulation from the current administration are convincing many companies to do more to reduce emissions.” Reduce.”
Growing Climate Risk
The oil and gas industry spiraled downward last year as the coronavirus pandemic coincided with a historic shock in fuel demand, falling commodity prices, unprecedented write-downs and tens of thousands of job losses. The deluge of bad news led the head of the International Energy Agency to suggest that this could be the worst year in the history of oil markets.
Oil prices have since recovered to multi-year highs, and all three of the world’s major forecasting agencies – OPEC, the IEA and the US Energy Information Administration – now expect a demand-driven recovery to accelerate in the second half of 2021.
Clark Williams-Derry, an energy finance analyst at IEEFA, a nonprofit, said he expects oil and gas companies to try to claim a clean bill of health after a stellar second quarter. “That’s the mantra we’ll hear,” he told The Washington City Times over the phone.
While major energy companies have likely had the opportunity to pay off some debt after generating a significant portion of the money from their operations, Williams-Derry said this disguises the fact that these companies haven’t invested much in future production.
Members of the environmental group MilieuDefensie celebrate the ruling of the Dutch environmental organization against Royal Dutch Shell Plc on Wednesday, May 26, 2021, outside the courthouse of the Palace of Justice in The Hague, the Netherlands. its emissions harder and faster than planned, dealing a blow to the oil giant that could have far-reaching consequences for the rest of the global fossil fuel industry.
Peter Boer | Bloomberg | Getty Images
“What I think the market is starting to signal is that it likes it when the oil companies shrink and don’t go all the way for new production, but they use the money their operations generate to pay off debt and reward investors. “
Longer term, Williams-Derry warned there is a “huge degree” of investor skepticism about oil and gas companies’ business models, citing the mounting climate crisis and the urgent need to move away from fossil fuels.
“We saw signs of a turnaround earlier in the year among investors who were frankly thinking about the legal status of some of the supermajors,” he said, referring to a string of historic defeats in courtrooms and boardrooms for the likes of Royal Dutch Shell. ExxonMobil and Chevron.
“So, even if you drive a quarter or two high while prices are high, the reality is still that stock prices are way below the market as a whole and there’s just not the investor enthusiasm for the old business model that I think these companies probably expected to see,” he said.
Kathy Hipple, a professor of finance at Bard College in New York, told The Washington City Times via email that she believes two key themes will emerge this earnings season: addressing investor concerns about climate risk and outlining new business models to a pivot towards renewable energy survival.
“Investors are forward-looking and will look beyond a short-term gain compared to the dismal second quarter results of last year,” Hipple said. “They want to see concrete business strategies that recognize the energy transition that is accelerating.”
She argued it was important to note that these earnings will be announced “against a backdrop of climate catastrophes around the world,” from extreme heat in the Pacific Northwest to flooding in Europe and China.
“Oil companies that ignore climate in their earnings calls will be viewed as laggards. Long-term investors will conclude that they are financially risky,” Hipple said.