“If 2020 was characterised by a plunge in commodity prices, asset write-downs and dividend cuts, the FTSE 100’s oil majors – Shell and BP – will be looking to try and get back on the front foot in 2021; as oil and gas prices rise, they look to return cash to shareholders and prove their ability to ready themselves for a net zero carbon world,” says AJ Bell Investment Director Russ Mould. “Investors are clearly sceptical that Shell and BP can successfully juggle – and fund – investment in their existing assets to maximise their value and spending on renewables and their new strategic direction, all while paying dividends, because the shares have failed to follow oil and gas prices higher.
“Next week’s first-quarter results, when BP reports on Tuesday 27th and Shell on Thursday 29th, will be a chance for both firms to show they can not only make the most of rising commodity prices to generate higher cashflow but also deploy that cashflow to best effect.
“Over the past year, Brent crude is up nearly 30%, but shares in BP and Shell are almost unchanged.
|
|
2021 to date |
Last year |
Last 3 years |
Last 5 years |
Last 10 years |
|
Change in Brent crude oil (%) |
29.3% |
137.9% |
(10.2%) |
51.7% |
(44.6%) |
|
Change in Henry Hub natural gas (%) |
7.8% |
56.3% |
3.4% |
31.6% |
(41.4%) |
|
|
|
|
|
|
|
|
FTSE 350 Oil, Gas and Coal index performance |
7.9% |
(1.1%) |
(46.2%) |
(25.0%) |
(44.0%) |
|
Sector ranking |
18 |
34 |
38 |
36 |
39 |
Source: Sharepad. Capital returns only. Based on the 40 FTSE 350 sectors.
“There are many possible explanations for this fairly turgid performance, besides scepticism over whether the oil majors can truly and effectively reinvent themselves.
• First, investors may be sceptical about the near-term sustainability of the recovery in oil and gas, given how OPEC has been holding back supply and the timing of an upturn in domestic and international travel, and thus demand, remains uncertain
• Second, investors continue to worry whether oil and gas fields will become stranded assets as the world looks to go net zero carbon by 2050 and gradually moves away from oil consumption
• Fund flows remain resolutely against big oil, as investors seek out firms which pass rigorous environmental, social and governance (ESG) screens, tests which the business of exploring for and producing hydrocarbons tends to fail.
• Both BP and Shell cut their dividends in 2020, BP for the first time in a decade and Shell for the first time since World War Two
“Some contrarians may see this as an opportunity, given how sentiment toward the sector is so washed out, how badly the stocks have performed, the possibility of an economic upturn and the likelihood that oil will be with us as a primary source of energy for some time to come, whether we like it or not.
“Others will fight shy on ESG grounds, either philosophical or pragmatic (given the ever-rising importance of fund flow), and simply walk away, but Mr Looney and Mr van Beurden will be looking to prove their operational and strategic attractions of their charges with the first-quarter results.
“The first number that will attract the attention of analysts is production. This was down by almost a sixth year-on-year in the fourth quarter at BP, including its share from Russia’s Rosneft. Asset sales will have played a part here but supply-side discipline could help set the tone for a recovery if and when oil demand picks up and average prices received should be well above the $31.80 per barrel of oil equivalent received in the first quarter of last year.
“Meanwhile, Shell’s oil and gas output fell by a tenth and liquefied natural gas sales volumes fell by a sixth, with asset sales again one reason for the drop.
“Shareholders will therefore be looking for updates from BP on production ramp-ups at major projects such as Atlantis Phase 3 and Thunder Horse in the Gulf of Mexico, India’s R Cluster and Khazzan Phase 2 in Oman, while Shell will be looking to prove the worth of projects in the Philippines, Malaysia, Norway, Qatar and the Gulf of Mexico.
Source: Company accounts
“Prices received will be up year-on-year and that should boost profits at the upstream operations (exploration and production), even if higher input costs could crimp margins at the downstream businesses (chemicals, refining and petrol stations). Shareholders will also be hoping that they are through the worst of the asset write-downs which marred upstream performance in 2020.
|
|
Replacement cost profit ($ million) |
|||||||
|
|
Q1 2019 |
Q2 |
Q3 |
Q4 |
Q1 2020 |
Q2 |
Q3 |
Q4 |
|
BP |
|
|
|
|
|
|
|
|
|
Upstream |
2,884 |
2,469 |
(1,050) |
614 |
1,023 |
(22,008) |
30 |
(592) |
|
Downstream |
1,765 |
1,288 |
2,016 |
1,433 |
664 |
594 |
915 |
1,245 |
|
|
|
|
|
|
|
|
|
|
|
Shell |
|
|
|
|
|
|
|
|
|
Upstream |
1,624 |
1,435 |
1,651 |
(855) |
(863) |
(6,721) |
(1,110) |
(2,091) |
|
Oil products* |
1,224 |
1,299 |
2,433 |
1,183 |
2,211 |
(3,023) |
2,092 |
(1,775) |
|
Chemicals |
452 |
(107) |
211 |
(78) |
146 |
164 |
131 |
367 |
|
Integrated gas |
2,795 |
1,340 |
2,597 |
1,897 |
1,812 |
(7,959) |
(151) |
20 |
Source: Company accounts. *Refining and marketing combined.
“After the headline numbers, analysts will home in on cashflow – because it is cashflow that pays the still all-important dividends.
“BP halved its dividend in the second quarter of last year, cutting it to 5.25 US cents a quarter, where it stayed in the third and fourth quarters. No change is expected this year either, according to the analysts’ consensus, and that would put the stock on a yield of 5%.
“Shell slashed its dividend by two-thirds at this stage a year ago, to $0.16 from $0.47 but increased that slightly to $0.1665 by the fourth quarter, when Mr van Beurden targeted a payment of $0.1735 per share for Q1 2021. The current analysts’ consensus forecast for the full year puts Shell on a forward yield of 3.7%, while in cash terms it still expected to the the FTSE 100 index’s third-largest single dividend payer at £4 billion (with BP in eighth at £3.1 billion).
Source: Company accounts, Marketscreener, consensus analysts' forecasts
“BP did note some good news in early April when Mr Looney noted the firm had hit its target of getting net debt down to $35 billion, thanks to cashflow and the completion of its $10 billion asset disposal programme. That gives the firm a bit more room for manoeuvre when it comes to investing in its assets and paying dividends, while Mr Looney has even hinted at share buybacks, though quite why he is bothering there is a matter for debate, since $41 billion of share buybacks since 2005 do not seem to have done much for the share price over the long term.
Source: Company accounts. Reflects dividends paid in cash only, not scrip.
“Shell has dropped similar hints that buybacks could be on the agenda at some stage, although investors may be keener to see investment in its competitive position as it adapts to hopes for a net-zero world. Again, $48 billion of buybacks since 2005 have not unduly helped Shell deliver strong share price returns.
Source: Company accounts. Reflects dividends paid in cash only, not scrip.
“One problem that both BP and Shell may face is that they are seen as keen sellers of hydrocarbon assets on the one hand and willing buyers of renewable and alternative energy source assets on the other. This raises the danger, given the pressure from shareholders (and wider society) to act that they get bad prices when they sell and overpay when they buy, to the long-term detriment of returns on capital and thus investors – although for the moment, the markets may just welcome signs of progress toward a ‘greener’ model and worry about the financial implications later.”
