Strategic clarity fuels US oil giants’ M&A spree
23/02/2024 12:00
(The authors are Reuters Breakingviews columnists. The
opinions expressed are their own.)
By George Hay and Yawen Chen
LONDON, Feb 23 (Reuters Breakingviews) - U.S. and
European oil giants sell the same product in the same global
market. But they are on diverging paths. While American groups
like Exxon Mobil XOM.N and Chevron CVX.N are buying up
smaller drillers, their European rivals such as Shell SHEL.L ,
BP BP.L and TotalEnergies TTEF.PA are largely sitting on
their hands. Part of the explanation is a transatlantic
disagreement about the long-term outlook for oil.
If the world is to limit increases in temperatures to 1.5
degrees Celsius above pre-industrial levels, demand for oil
needs to shrink from 100 million barrels a day to 24 million
barrels by 2050, according to the International Energy Agency.
Faced with this scenario, fossil fuel producers have a limited
range of options. They can keep pumping and hope they outlast
smaller rivals; pivot to other forms of energy that emit little
or no carbon dioxide; or gradually wind themselves down while
returning cash to shareholders. There is one other alternative,
though: simply assume that demand for oil will not decline.
Forecasts circulated by U.S. oil giants suggest they have
chosen the fourth option. In January Exxon Mobil, headed by
Darren Woods, said daily demand under its central scenario for
2050 would be roughly the same as the current 100 million
barrels, while natural gas consumption would rise by 25%.
Chevron boss Mike Wirth is more circumspect, but cites
third-party forecasts that assume daily oil consumption will lie
in a range between 70 million and 112 million barrels in the
decade from 2040 to 2050.
The Europeans are fuzzier and a lot less bullish. Under its
“Archipelagos” scenario Shell sees daily oil demand of 90
million barrels in 2050, but only around 40 million barrels
using estimates in one called “Sky 2050”. BP’s “New Momentum”
model assumes 73 million barrels of daily 2050 consumption, but
a separate net zero scenario cites only 21 million barrels.
TotalEnergies, meanwhile, reckons demand for oil and biofuels
could range between 51 and 71 million barrels a day.
Any of these 2050 visions could be correct. But if higher
oil demand scenarios transpire, U.S. oil group investors will be
big winners. Production by U.S. oil majors will grow 6% a year
between 2022 and 2030, according to Bernstein analysts, while
big European groups will only pump 0.6% more. If oil prices
remain at their current $84 a barrel level, the Americans will
make substantially more money. This calculation helps explain
why Exxon recently forked out $64.5 billion in a
share-based deal for Pioneer Natural Resources PXD.N , while
Chevron paid $53 billion for its U.S. rival Hess HES.N .
Woods and Wirth’s dealmaking also comes with a built-in
hedge in case optimism about oil demand proves misplaced.
Exxon’s Pioneer deal will help the group to reduce production
costs and emissions emanating from the drilling process, Wood
Mackenzie analysts say, allowing it to be more profitable than
the competition even if oil prices fall. Gulf giants like Saudi
Aramco 2222.SE make a similar case, arguing that
market-beating low costs will allow them to be the industry’s
“last man standing” as demand for the black stuff dries up.
This logic might spur new BP boss Murray Auchincloss,
TotalEnergies CEO Patrick Pouyanné and Shell’s Wael Sawan to
bulk up in oil as well. But their lack of a clear long-term
forecast complicates matters. If the oil market is going to
shrink substantially, it will be impossible for all the
industry’s major players to keep pumping at their current level.
At the same time, though, the European groups’ view of oil’s
future is not sufficiently bleak to justify a head-long rush
away from fossil fuels and into buying green energy groups like
$25 billion RWE RWEG.DE , $24 billion Orsted ORSTED.CO , or
$22 billion SSE SSE.L .
The transatlantic divergence owes much to investors’
preferences. European shareholders have tended to be more antsy
about climate change, while U.S. institutions have been less
bothered about pivoting away from investing according to
environmental, social and governance criteria. Global
sustainable funds saw outflows in the fourth quarter for the
first time since Morningstar Manager Research started keeping
tabs in 2018. Even Exxon’s climate-minded activist investor
Engine No. 1 voted down shareholder proposals for the group to
reduce emissions, and supported the Pioneer transaction. The
disconnect shows up in valuations: including debt, Exxon and
Chevron are valued at nearly 6 times the EBITDA analysts
forecast them to make in 2024, according to LSEG data. Shell, BP
and TotalEnergies languish on less than 4 times.
For all their apparent strategic clarity, it’s possible that
Exxon and other oil bulls are wrong about future oil demand. If
world leaders finally take climate change seriously, they might
implement stringent carbon taxes, which could prompt a slump in
demand for oil. Crude prices could then fall to $24 a barrel,
according to an Exxon analysis incorporating the IEA’s net zero
scenario. U.S. groups would then have to rapidly redirect
capital spending into lower-carbon fuels like hydrogen, where
future demand is still uncertain.
U.S. oil majors also face the obvious problem of elevated
emissions from all the extra oil they plan to pump. One option
is to suck the carbon they belch out of the air. But to cancel
out the vast increase in emissions, each of the industry giants
would have to invest $25 billion in developing carbon capture,
storage and removal capacity every year until 2050 while
spending another $10 billion a year on average to maintain their
current oil production, the IEA reckons. That’s substantially
more than their current average annual capex budgets.
Still, investors value clarity, which European groups lack.
BP’s Auchincloss wants to devote 25% of the group’s capital
spending to low-carbon investments by 2025, but attempts so far
to gain scale quickly in renewable energy have stuttered. The
British company recently wrote down the value of key U.S. wind
power projects. More importantly, BP last year said it plans to
cut oil and gas production by 25% between 2019 and 2030,
watering down a previous target of 40%. Formerly supportive
investors like the Church of England’s Pensions Board and Dutch
pensions scheme PFZW have sold shares in large European oil
groups because they are insufficiently green.
BP, Shell and TotalEnergies are tackling this uncertainty by
returning lots of cash to shareholders. The notable feature of
recent full-year results from the three companies was a series
of multibillion-dollar share buybacks. If European groups don’t
want to bulk up in oil like their U.S. rivals, but remain
reluctant to shift quickly enough into other forms of energy,
the main other option available will be to slowly wind
themselves down.
Follow @gfhay and @ywchen1 on X
CONTEXT NEWS
Dutch pension fund PFZW, which managed about 238 billion
euros ($256 billion) at the end of 2023, said on Feb. 8 it had
sold its holdings in 310 oil and gas companies – worth around
2.8 billion euros – after a two-year engagement programme. It
divested its holdings in Europe’s top oil and gas companies,
including Shell, BP and TotalEnergies, saying they are not
moving fast enough to reduce emissions.
PFZW, through its asset management division PGGM, will also
step down as one of two pension funds leading climate
negotiations with Shell since 2022 on behalf of the Climate
Action 100+ (CA100+) investor group comprising $68 trillion in
assets, a spokesperson said. In response, Shell said the
decision “has no benefit to the climate. It will not change
actual use of energy and continues to portray an incorrect
understanding of the needed changes to today’s energy system.”
TotalEnergies said “we believe exclusions only transfer
shareholding to other investors that might be less ambitious
than PGGM and PFZW in terms of climate transition.”
TotalEnergies said on Feb. 7 it plans to increase its
interim dividend by 6.8% to 0.79 euros per share and buy back
shares worth $2 billion in the first quarter of 2024. That would
be the base level for quarterly buybacks “in the current
environment”, it said.
BP on Feb. 6 increased the rate of its share buybacks to
$1.75 billion over the next three months from $1.5 billion in
the previous quarter. The British company expects to purchase
shares worth $14 billion over 2024 and 2025. New CEO Murray
Auchincloss told Reuters on the same day that BP could grow its
oil output beyond its 3% target for 2022 to 2027, depending on
returns.
Shell on Feb. 1 increased its fourth-quarter dividend by 4%
and said it would repurchase a further $3.5 billion of its
shares over the next three months, a similar rate to the
previous three months. Shell’s payouts to shareholders reached
around $23 billion in 2023.
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Graphic: Exxon’s oil demand outlook is rosier than the
International Energy Agency’s https://reut.rs/3SJko97
Graphic: US oil giants trade on higher valuations than European
peers https://reut.rs/42Q1y4U
Graphic: Oil giants’ acquisitions and divestments in 2021-2023
https://reut.rs/3wkMEXU
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(Editing by Peter Thal Larsen and Oliver Taslic)
((For previous columns by the authors, Reuters customers can
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george.hay@thomsonreuters.com; Reuters Messaging:
george.hay.thomsonreuters.com@reuters.net
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