LONDON: As major oil companies prepare to spend billions on renewable energy assets to stay relevant in 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 of dollars on major oil and gas assets and costly drilling programmes in remote parts of the world in a relentless drive to produce more.
Fast forward through an oil price crash in 2014 followed by the fallout from the coronavirus 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, Chief Executive 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 an unexpected global 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 programme.
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 power suppliers that would thrive in a world of clean energy.
To hit their goals in time, though, they will almost inevitably 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 of dollars off the value of their assets and it 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.
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 towards cutting debt.
So 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 oil prices and a weak deal-making record, the big oil companies face a tough task getting investors on board.
“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 Chief Executive 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.— Reuters
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