Encouraged by the U-turn in the U.S. energy policies under President Trump, investors are back to backing oil and gas majors as the self-righteous ESG hype is waning, especially in corporate America.
For all the environmental, social, and governance craze of the past few years in markets, ESG has done value investors one big favor—it has helped sink the valuations of oil and gas companies to bargain levels, alongside the oil price crash of 2020, of course.
These super-low valuations of Big Oil and other oil and gas firms have encouraged bargain hunters and contrarian investors to continue betting on fossil fuels amid a major market and ideological drive against these.
The Big Pivot
For example, for most of 2020 and 2021, ExxonMobil, the biggest U.S. oil firm by valuation, saw its share price dive to less than the per-share value of all its assets. The price to tangible book value per share slumped to below 1, compared to about 3 in the previous two decades, according to data compiled by Bloomberg and cited by Bloomberg Opinion columnist Javier Blas.
However, the Russian invasion of Ukraine, the subsequent spike in energy prices, and the energy crisis were the beginning of the end for ESG and for super-bargain valuations.
The specter of $100 a barrel oil for longer in case of supply shortages helped the narrative of the U.S. supermajors. Exxon and Chevron never backed down from their position that the world will need oil and gas for the foreseeable future and investments in solar and wind aren’t a good fit for a company chasing high returns and payouts to shareholders.
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Europe’s Big Oil, especially Shell and BP, had to retract strategies that promised in 2020 a decline in their oil output by the end of the decade, to resets in 2024 and 2025 with renewed focus on the upstream and pledges to boost oil and gas production to meet the world’s growing energy needs.
BP and Shell also scaled back, significantly, their pledges to invest in renewable energy sources—they have ditched projects for biofuels plants in the Netherlands and channeled more cash to core oil and gas operations at the expense of investments in renewables. Clean energy solutions, including offshore wind and green hydrogen, have stumbled upon high interest rates and supply chain issues in recent years to make projects much more expensive and less lucrative. That was a deal breaker for Big Oil firms, which hate to lose money when oil prices are down in the cyclical business of energy commodities, and don’t need additional drags on finances with losses in their low-carbon energy divisions.
Europe’s Big Oil found out firsthand that the renewables business isn’t bringing the profits that the core oil and gas business is generating. Faced with the difficult task of rewarding shareholders with attractive yields and payouts and stopping the investor outflow from the industry, and with an energy crisis with soaring oil and gas prices, Shell and BP drastically scaled back their ambitions in renewables and shifted their focus on oil and gas again.
Shell’s CEO Wael Sawan has said that reducing global oil and gas production would be “dangerous and irresponsible” as the world still needs those hydrocarbons.
Equinor of Norway, where electric vehicles hold an enormous market share and power comes from hydro and wind, has also acknowledged that market conditions in the clean energy sector have changed and the energy transition is going forward with an uncertain and uneven pace.
Equinor, which now produces a large part of the gas going to Europe via pipelines, expects to keep a high level of oil and gas production in Norway “all the way to 2035.”
The Big Rebound?
The return to the core business of the European majors and the doubling down on the Permian and global exploration hotspots such as Guyana for Exxon and Chevron have restored some of the market valuations lost in the 2020 carnage. Exxon now trades at 1.8 times the value of its assets, per Bloomberg’s estimates.
BP, which was the center of speculation of a takeover earlier this year, has now seen its shares gain 30% since the early-April low.
At higher – but not too high – valuations, Big Oil still looks like a bargain for investors, especially compared to the other S&P 500 sectors and Big Tech.
The investors that have stuck with the oil industry over the past five turbulent years in markets, geopolitics, and the U-turn of U.S. energy policies now expect the increased valuations to lead to looser financial discipline at some point in the future, Bloomberg’s Blas argues.
However, oil prices below $70 per barrel and expectations of a glut in the oil and LNG markets in the near term are keeping Big Oil anchored to prudent investment policies, with priorities firmly geared toward raising production and returns for investors.
By Tsvetana Paraskova for Oilprice.com
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