LONDON (Reuters) – 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 (RDSa.L) 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 (XOM.N) $30 billion acquisition of North American natural gas producer XTO in 2009 to Repsol’s (REP.MC) $8.3 billion takeover of Canada’s Talisman Energy just months before the 2014 crash to Occidental Petroleum’s (OXY.N) 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.”
(Graphic: Big Oil’s recent writedowns, EQNR.OL), have also cut dividends and suspended share buybacks.
BP’s total shareholder return, which assumes dividends are reinvested in its shares, is just 1.4% since 2015, while for Exxon it was minus 7.3%, the weakest in the sector, according to Refinitiv data.
Chevron (CVX.N) had the strongest total returns at 5.9%.
(Graphic: Big Oil’s total returns, ORSTED.CO), for example, have more than doubled over the past two years, giving it a market capitalisation of about $45 billion.
Shares in Spanish utility Iberdrola (IBE.MC), one of the world’s biggest renewable power companies have jumped 180% in two years to give it a market value above $80 billion.
Valuations of companies such as Orsted could also rise further as many of Europe’s top oil and gas companies compete amongst themselves to expand their low-carbon businesses fast.
Still, some investors said that as the European oil companies evolve into becoming low-carbon businesses, they might attract a different kind of investor more interested in long-term stability than bumper shareholder payouts year after year.
“Traditional oil and gas investors are fond of the high returns and, until recently, the outsized dividends associated with the sector.” said Alasdair McKinnon, portfolio manager at The Scottish Investment Trust.
“However, this shift may attract a different set of investors who look at the prospectively lower returns on offer from renewables with a less jaundiced eye.”
(This story has been refiled to add ‘a’ in paragraph 1)