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29 April 2021

Euro oil majors net zero mettle tested as profits return

The three European oil supermajors – BP, Shell and Total – are all back to their old ways, financially at least. In their quarterly reports this week, all three announced a return to pre-pandemic levels of profit.

Their struggles with the pandemic are not yet over – demand still remains suppressed due to global travel restrictions – but as cash flows start to increase, the climate promises that all three made will now be tested. Were they simply trying to keep investors sweet with false promises of transformation, or will we see a huge wave on investment in clean energy from some of the world’s most powerful companies? All three have announced plans to reach net zero emissions by 2050, although the scope of these declarations is somewhat varied.

BP arguably made the largest noise about its transition to a net zero company by 2050 through the pandemic. The company was the first to announce its quarterly results on Tuesday, with profit returning to $3.3 billion for Q1 2021, up from a loss of $628 million last year, when oil prices tumbled in tandem with demand from China – the epicenter of the pandemic.

In April last year, oil prices fell to 21-year lows of below $20 per barrel – they are now back up at pre-pandemic levels of around $68 per barrel, boosted by production cuts from OPEC+ nations and a general economic recovery worldwide. Through using consolidated assets, oil refining margins have also improved for nearly all oil majors.

BP also stated that the past three months have seen a “an exceptional gas marketing and trading performance,” bolstering its revenues. Similarly, cost cutting measures also seem to be coming into play; BP announced plans to cut 10,000 jobs from its workforce last June, while Shell announced a similar figure of 9,000. Total has been more resistant to such measures.

BP’s profit also indicates a four-fold increase compared to Q4 2020, indicating a return to normality in markets like the US, where vaccine rollouts have been strong. In his presentation to investors, CEO Bernard Looney hailed the company’s method of “performing while transforming,” reemphasizing BP’s decarbonization plans and shift from an Integrated Oil Company (IOC) to an Integrated Energy Company (IEC).

BP has managed to pull its operating cash flow up to $6.1 billion – a figure which is six times greater than in Q1 2020. With the company seemingly swimming in cash, BP has reduced its debt by $5.6 billion through the quarter to a level of $33.3 billion. Looney has stated that this is sufficient for the company to commence its $500 million scheme to buy back shares from investors, one year ahead of schedule.

“And at the same time, we’ve delivered disciplined strategic progress right across BP – including building a high-quality offshore wind business, making great strides in our electrification agenda and setting ourselves up for further growth in the Gulf of Mexico,” he said.

In other recent news, BP has reportedly filed an application with the US Federal Energy Regulatory Commission (FERC) to establish a retail power business in the country. This aims to support its plans to sell wind, solar and natural gas generated electricity, with an initial focus on the states of California, Illinois, Ohio, Pennsylvania and Texas.

In the US, BP currently generates renewable energy from several onshore wind and solar assets through Lightsource BP, of which it holds a 50% stake. It is also jointly developing the 1,260 MW Empire Wind 2 and 1,230 MW Beacon Wind 1 offshore wind farms with Equinor off the East Coast. Alongside this, the company this week signed a deal with Iberdrola and Energas to develop a 20 MW electrolysis project in Spain by 2023.

BP has set a target to increase its renewable energy generation capacity from nearly 3.3 GW in 2020 to 50 GW by 2030, while its annual electricity trading volumes rise from 214 TWh to 500 TWh.

Shell and Total are also aiming to develop their retail power businesses, with an increased presence across the electricity supply chain, including electric vehicle charging to smart meters for residential customers.

Shell released its results on Thursday, with a 13% rise in earnings between Q1 2020 and Q1 2021, despite a slight $200 million knock due to reduced trading through Texas’ intense winter storm. For the quarter, the company, which was hit slightly later by the impact of the pandemic, profits rose from $2.9 billion to $3.2 billion.

Sales of oil and gas assets in countries including Nigeria, Canada and Egypt added $1.4 billion to Q1 profits, despite an overall 13% reduction of fuel sells compared to the same period last year.

Shell also warned of “significant uncertainty” within its short-term outlook, with volatile lockdown measures, lower seasonal gas demand and further asset sales. Upstream oil and gas production, which has fallen 9% to 2.46 million barrels of oil equivalent per day for the quarter, is forecast to fall again to 2.25 million barrels for Q2.

While BP is looking to buy back shares to appease investors, in lieu of historically attractive dividends, Shell – which is now in a similarly strong cash position having increased cash flow from $6.3 billion to $8.3 billion and brought debt down to $71.3 billion – will look to bring its dividends back. Shell cut its dividend for the first time since World War II in April last year, from 47 cents to 16 cents per share, as Q1 profits fell by 46%. For Q1 2021, this dividend was raised by 4% to 17.35 cents per share, as it starts to creep back to where it was.

It is, however, unlikely that high dividends will return until Shell reaches its net debt target of $65 billion, at which point it also intends to start repurchasing shares. Through doing this, both Shell and BP will hope to reduce the severity of rising dividend payouts – and increase the share and amount of spending on clean energy projects.

The final of the three European majors, Total, also released its results on Thursday, with a similar growth in net income due to higher oil and gas prices, margins, diversified electricity sales and activity in its trading segment. Compared to Q1 2020, the company – which recently announced a rebranding to Total Energies – reported a 69% increase in net income to $3 billion. Like Shell, this came in spite of a 7% reduction in hydrocarbon production to 2.863 million barrels of oil equivalent per day.

In its short-term outlook, the company stated that its improved cash flow will be used to fund annual investments of between $12 billion and $13 billion: half into maintaining existing activities and the other half for growth in sectors including renewable energy. The group did not, however, raise its dividend, which will remain at €0.66 per share.

Following recent acquisitions of solar projects in the US and a stake in Adani Green Energy, Total has increased its projected renewables portfolio for 2025 from 17.9 GW to 28 GW in the past three months.

Norwegian oil company Equinor also posted Q1 profits of $1.85 billion on Thursday up from a loss of $0.71 billion in Q1 2020, and increased its dividend payout to shareholders to $0.15 per share.