It makes for a great headline. “Supermajor X reports bumper financials and a return to pre-pandemic profit levels.” After taking a hammering over 2020 as Covid-19 drastically reduced fuel consumption, a combination of the global economy re-opening and crude oil prices strengthening back to pre-Covid levels have allowed the world’s energy supermajors to record strong Q1 2021 financial results. And those great results are to the benefit of shareholders too.
BP kicked off this earnings seasons with a headline just like that. Trumpeting ‘better-than-expected’ earnings for Q1 2021, its results heralded a return to stabler footing after a prolonged period of uncertainty, with CEO Bernard Looney stating that the ‘results really answer many of those questions (of risk).’ Net profits came in at US$2.6 billion, significantly higher than the market estimate of US$1.4 billion and above the Q1 2020 net profit of US$791 million. BP attributed its performance to strong oil prices and refining margins, as well as exceptional natural gas marketing and trading performance. Net debt also fell to US$33.3 billion, meaning BP had hit its target of reduction to US$35 billion as planned. The latter raised some eyebrows, given suspicions that BP’s canny trading unit may have struck a bonanza during the chaotic winter storm that plagued Texas in March, although BP was coy on the extent to which it had profited from that crisis. Still, the results speak for itself. And shareholders will now benefit with BP stating its intention to resume share buybacks of some US$500 million in Q2 2021. It seems to be proof that even though BP has created many headlines about transitioning into a post-oil and gas supermajor, it is and will remain a traditional energy powerhouse for a while.
Royal Dutch Shell followed, announcing net profits of some US$3.23 billion, up from US$2.86 billion y-o-y and above the average analyst expectations of US$3.06 billion. This was, again, a return to pre-pandemic levels of profit. Like BP, Shell had also taken advantage of its stronger financial position to pare down net debt by US$4.1 billion. And like BP, Shell has also restored its dividend position, raise payouts by 4% after slashing it (though not entirely) in 2020. Chemicals were a particular bright spot in its portfolio, and many Wall Street and City analysts believing that Shell will also resume its share buyback programme – once one of the largest in the world – in 2022, if not earlier.
France’s Total rounded off the European swathe of earnings announcements, which included a restoration to 2019 of net profits for the likes of Equinor, Eni and Repsol. Unlike BP and Shell, which had either halted or reduced dividends throughout the pandemic, Total had maintained its payout over the period. Net profits hit US$3 billion, up 69% y-o-y and above market expectations of US$2.35 billion, driven by the natural gas and power segment, with gas trading also singled out as a bright spot, for the same reasons as BP. With less pressure on Total to up its dividends payout, the French supermajor announced that it would be funnelling cash into new energy projects to fuel its transition into a clean energy powerhouse, just like BP.
On the other side of the (Atlantic) pond, the results were slightly different. Chevron managed to report a net profit of US$1.72 billion, which was lower than Q1 2020 net profits of US$2.45 billion. This was attributed weaker refining margins and the aftermath of the Texas winter storm that affected US supermajors and majors more given their wider footprint in the downstream sector there. Nonetheless, free cash flow was a major bright spot, supporting an increased dividend payout, though that itself was driven by a 43% reduction in capital expenditure as Chevron retreated from its most risky and costly mega projects.
ExxonMobil rounded off this earnings season, with net profits of some US$2.7 billion, a rebound from last year’s first quarter loss of US$610 million. This was probably the most closely watched of all the supermajor results, given the swings that ExxonMobil had taken financial across the Covid-19 pandemic period in regards to asset impairments. Like Chevron, ExxonMobil announced that it had been severely impacted by the Texan winter storm – to the tune of some US$600 million. Unlike BP and Total, ExxonMobil (and Chevron) does not have as strong a trading desk presence in natural gas globally to offset the on-the-ground operational and production losses from the deep freeze. The results are still exemplary though, but pressure will now build on ExxonMobil to restore its share buyback programme that was halted in 2016, especially now that BP has jumped the gun on that area.
All in all, this earnings season will be a relief to the energy industry and its investors. It is proof that the industry has weathered the largest disruption to the global economy since World War II, and is capable to reorganising quickly to bounce back when conditions change. The threat of Covid1-19 is still ever present – particularly with the risk of virus mutations – but for the investors that stuck with the supermajors throughout the crisis, it is time to reap rewards.
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On 10 December 2021, if all goes to plan Royal Dutch Shell will become just Shell. The energy supermajor will move its headquarters from The Hague in The Netherlands to London, UK. At least three-quarters of the company’s shareholders must vote in favour of the change at the upcoming general meeting, which has been sold by Shell as a means of simplifying its corporate structure and better return value to shareholders, as well as be ‘better positioned to seize opportunities and play a leading role in the energy transition’. In doing so, it will no longer meet Dutch conditions for ‘royal’ designation, dropping a moniker that has defined the company through decades of evolution since 1907.
But why this and why now?
There is a complex web of reasons why, some internal and some external but the ultimate reason boils down to improving growth sustainability. Royal Dutch Shell was born through the merger of Shell Transport and Trading Company (based in the UK) and Royal Dutch (based in The Netherlands) in 1907, with both companies engaging in exploration activities ranging from seashells to crude oil. Unified across international borders, Royal Dutch Shell emerged as Europe’s answer to John D Rockefeller’s Standard Oil empire, as the race to exploit oil (and later natural gas) reserves spilled out over the world. Along the way, Royal Dutch Shell chalked up a number of achievements including establishing the iconic Brent field in the North Sea to striking the first commercial oil in Nigeria. Unlike Standard Oil which was dissolved into 34 smaller companies in 1911, Royal Dutch Shell remained intact, operating as two entities until 2005, when they were finally combined in a dual-nationality structure: incorporated in the UK, but residing in the Netherlands. This managed to satisfy the national claims both countries make on the supermajor, second only to ExxonMobil in revenue and profits but proved to be costly to maintain. In 2020, fellow Anglo-Dutch conglomerate Unilever also ditched its dual structure, opting to be based fully out of the City of London. In that sense, Shell is following the direction of the wind, as forces in its (soon to be former) home country turn sour.
There is a specific grievance that Royal Dutch Shell has with the Dutch government, the 15% dividend tax collected for Dutch-domiciled companies. It is the reason why Unilever abandoned Rotterdam and is now the reason why Shell is abandoning The Hague. And this point is particularly existentialist for Shell, since its share prices has been battered in recent years following the industry downturn since 2015, the global pandemic and being in the crosshairs of climate change activists as an emblem of why the world’s average temperatures are going haywire. The latter has already caused the largest Dutch state pension fund ABP to stop investing in fossil fuels, thereby divesting itself of Royal Dutch Shell. This was largely a symbolic move, but as religious figures will know, symbols themselves carry much power. To combat this, Shell has done two things. First, it has positioned itself to be at the forefront of energy transition, announcing ambitious emissions reductions plans in line with its European counterparts to become carbon neutral by 2050. Second, it is looking to bump up its dividend payouts after slashing them through the depths of the Covid-19 pandemic and accelerating share buybacks to remain the bluest of blue-chip stocks. But then, earlier this year, a Dutch court ruled that Shell’s emissions targets were ‘not ambitious enough’, ordering a stricter aim within a tighter timeframe. And the 15% dividend tax remains – even though Prime Minister Mark Rutte’s coalition government has been attempting to scrap it, with (it is presumed) some lobbying from Royal Dutch Shell and Unilever.
As simplistic it is to think that Shell is leaving for London believes the citizens of the Netherlands has turned its back on the company, the ultimate reason was the dividend tax. Reportedly, CEO Ben van Buerden called up Mark Rutte on Sunday informing him of the planned move. Rutte’s reaction, it is said was of dismay. And he embarked on a last-ditch effort to persuade Royal Dutch Shell to change its mind, by immediately lobbying his government’s coalition partners to back an abolition of the dividend tax. The reaction was perhaps not what he expected, with left-wing and green parties calling Shell’s threat ‘blackmail’. With democracy drawing a line, Shell decided to walk; or at least present an exit plan endorsed by its Board to be voted by shareholders. Many in the Netherlands see Shell’s exit and the loss of the moniker Royal Dutch – as a blow to national pride, especially since the country has been basking in the glow of expanded reputation as a result of post-Brexit migration of financial activities to Amsterdam from London. The UK, on the other hand, sees Shell’s decision and Unilever’s – as an endorsement of the country’s post-Brexit potential.
The move, if passed and in its initial stages, will be mainly structural, transferring the tax residence of Shell to London. Just ten top executives including van Buerden and CFO Jessica Uhl will be making the move to London. Three major arms – Projects and Technology, Global Upstream and Integrated Gas and Renewable Energies – will remain in The Hague. As will Shell’s massive physical reach on Dutch soil: the huge integrated refinery in Pernis, the biofuels hub in Rotterdam, the country’s first offshore wind farm and the mammoth Porthos carbon capture project that will funnel emissions from Rotterdam to be stored in empty North Sea gas fields. And Shell’s troubles with activists will still continue. British climate change activists are as, if not more aggressive as their Dutch counterpart, this being the country where Extinction Rebellion was born. Perhaps more of a threat is activist investor Third Point, which recently acquired a chunk of Shell shares and has been advocating splitting the company into two – a legacy business for fossil fuels and a futures-focused business for renewables.
So Shell’s business remains, even though its address has changed. In the grand scheme of things, never mind the small matter of Dutch national pride – Royal Dutch Shell’s roadmap to remain an investment icon and a major driver of energy transition will continue in its current form. This is a quibble about money or rather, tax – that will have little to no impact on Shell’s operations or on its ambitions. Royal Dutch Shell is poised to become just Shell. Different name and a different house, but the same contents. Unless, of course, Queen Elizabeth II decides to provide royal assent, in which case, Shell might one day become Royal British Shell.
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