Over the last decade, oil companies had to adapt to a dramatically lower commodity price environment. At the start of a new decade, IOCs are being challenged to adapt again. This time the challenge is more strategic: how do oil and gas companies navigate their way through the energy transition?
For the first time during the IOCs’ fourth quarter earnings calls the topic of the energy transition attracted more questions from analysts than any other topic, including the more traditional focus areas around portfolio optimization, cashflow, production and capital spending. This was perhaps a reflection of IOCs’ prepared remarks including more detail about specific.
There has been a notable stepup in ambition by the European IOCs on the climate challenge. In the fourth quarter earnings presentations, companies announced targets to reduce the net carbon intensity of their production, including for scope 3 emissions. While European IOCs have raised the bar, their US peers are not yet feeling the same pressure from investors on climate change. However, societal opinion will not standstill and we expect that the bar will continue to be raised.
Analysts asked whether IOCs would be prepared to sacrifice some of their ambition around carbon in order to preserve returns. The IOCs highlighted the level of returns they require to sanction investment in lower-carbon projects and indicated an intention to provide more visibility on this sector as it grows.
Some analysts sought to square IOC’s plans to ramp up investment in low-carbon businesses, while also maintaining investment in oil and gas activities, and staying within their capital framework. Analysts queried whether companies would need to substantially reshape their portfolios to meet carbon neutrality targets. The upstream business has historically funded dividends and buybacks and some analysts questioned whether a shift to a lower oil and gas production base could impact the capacity to fund the current level of dividend.
Companies reiterated their commitments to share buybacks, with the caveat that the pace of these programs would be subject to preserving balance sheet strength and the wider macro environment outlook. A year of price volatility and weaker refining and chemicals margins impacted fourth quarter and full year earnings and cash flow performance of all the oil majors.
Analysts sought guidance on the impact of the coronavirus outbreak on oil and gas demand. Companies highlighted the immediate disruption due to travel and economic activity in China being curtailed but there was no consensus on any potential longer-term demand growth slowdown.
Analysts were told that the receipts from asset sales would primarily be used to reduce debt. Questions were posed on the potential for additional asset sales, in what analysts described as a tough market for sellers. IOCs highlighted their recent success in divesting packages of assets despite the weak macro backdrop. In a further reference to the energy transition theme, analysts asked if the carbon intensity of assets plays a significant role in decisions on whether to divest them.
Given the industry headwinds, companies faced more questions about cost control this quarter.
Companies were pressed on what actions they could take to further drive down costs. Most indicated that there remained scope to reduce the cost base through traditional cost management strategies but also pointed to the benefits of digitalization not being fully reflected in the bottom line yet.
The companies included in this review are BP plc, Chevron Corporation, Equinor ASA, ExxonMobil Corporation, Royal Dutch Shell plc and Total S.A