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With crude oil prices having swollen to their highest levels since late 2018, Big Oil is back to Big Profits. Continuing a trend that kicked off in at the start of 2021, the world’s largest oil and gas companies have been capitalising on the recovery in consumption and the unusual production discipline from OPEC+. Despite squabbles within the crude producer group, sanity has prevailed and supply levels have been restrained, deliberately lagging behind growing demand from resurgent economies to clear the huge glut inherited from 2020. Easing economic restrictions afforded by the world’s largest vaccination drive have led to demand for fuels surging back – in some cases, back to pre-pandemic levels – and even with the delta and lambda variants looming, all are hoping (and betting) that the worst is over.
With big profits come big expectations. The turbulence that the industry has seen since 2015, a prolonged slump that led to a brief period of ambition that was killed stone cold by Covid-19, has left all supermajors and majors in a state of caution. In those years, the conversation around fossil fuels has changed dramatically. Having always been looming over, the issue of climate change has now taken centre stage. It has taken root and is beginning to bud in Europe; it is accelerating, despite some resistance in the USA; and even in emerging economies, the question of clean energy and carbon capture is now a part of the conversation.
What this means for the energy industry is that the glare of scrutiny has intensified, requiring them to pivot towards clean energy and carbon neutral targets. And what that also means is that capital is becoming scarcer. Several large sovereign and independent wealth funds have already abandoned investment in fossil fuel firms, turning their considerable amount of capital towards financing clean energy. This doesn’t mean that the likes of the supermajors are starved for funds, but they certainly need to shine brighter to regain their investment lustre. Big profits won’t lead to big spending anymore – unless it is investment into clean energy. But those profits aren’t being channelled into paring down debt and strengthening balance sheets either. Instead, Big Oil is turning its Big Profits into Big Rewards for its shareholders. The message this is trying to send is clear: “investors, please stick with us… we will get cleaner, we promise… and there will be plenty of dividends along the way.”
Shell kicked off the earning season with a blockbuster announcement that set the tone for the rest. With reported net profits of US$5.53 billion for Q2 2021, Shell announced that it would be raising its dividend by almost 40% and kickstart a share buyback worth US$2 billion. Chemicals were a particular highlight in Shell’s performance – reflecting the broader strength in manufacturing driven by online spending and shifting consumer habits over the pandemic period – but Shell still has a way to go to convince its shareholders fully. The raised dividend still does not fully restore the two-thirds slash that Shell took to its dividend payout last year at the onset of the Covid-19 crisis. Shell’s share price remains some 40% lower than pre-pandemic levels despite a full recovery in oil prices and a restoration of major profit levels.
France’s TotalEnergies also reported a huge surge in net profits, US$3.5 billion compared to US$126 million a year ago. Unlike Shell, TotalEnergies had been in position to maintain its dividend scheme over the pandemic, but did join in the payout party by announcing share buybacks. Tied to the Total’s target crude price level of US$60/b, 40% of the newly-renamed TotalEnergies’ cash flow above the target level would be used for share buybacks, with a total value of at least US$800 million and potentially US$1 billion if average prices hit US$68/b. In the UK, BP kept the trend going, raising its dividend by 4% and previewing a stock buyback scheme of US$1.4 billion for 3Q 2021, while promising to increase dividends by 4% annually and repurchase US$1 billion of shares each quarter until 2025 is crude oil prices average above US$60/b. BP’s net profit for the second quarter was US$2.8 billion, compared to a mammoth loss of US$6.68 billion a year earlier.
Elsewhere in Europe, other major players like Equinor, Eni and Repsol followed the same theme of increased profits leading to increased payouts. It wasn’t just in Europe, but across the world. In North America, Chevron’s net profits rose to US$3.3 billion for Q2 2021 from a US$2.9 billion loss a year earlier, leading the supermajor to revive a share buyback scheme suspended at the start of the pandemic involving share buybacks of some US$2-3 billion per year. The likes of ConocoPhillips, Occidental Petroleum and even refiners like Marathon Petroleum crushed earnings estimates and rewarded shareholders. Even the world’s largest oil firm – Saudi Aramco – shattered expectations, reporting net profits of some US$25.5 billion, most of which will be channelled the government of Saudi Arabia.
There was a lone holdout in the payout party for the quarter. And it was a major one. ExxonMobil posted its highest profits in two years – at US$4.69 billion, up from a loss of US$1.08 billion a year ago – as well as recording its highest chemical profits on record. However, ExxonMobil won’t be spending much of that excess cash flow on its investors, having frozen its dividend levels and refraining from initiating a share buyback. Instead, CEO Darren Woods will be focusing on repairing its balance sheet and bottom line, having burned through nearly US$28 billion in cash over two years. ExxonMobil’s net debt rose by nearly 40% to a record US$68 billion in 2020 and Woods will be focusing on paring this down, after suffering a bruising proxy battle with activist investor Engine No. 1 that forced it to replace a quarter of its Board of Directors, lest it brews another revolt.
The main beneficiaries of this new magnanimity will, of course, be shareholders. Wooing investors has historically never been a problem for Big Oil. But as the industry comes under increasing pressure to shift away from polluting fossil fuels towards embracing clean energy while the world grapples with a warming planet, energy companies are struggling to justify their current reliance on fossil fuels to power their revenues and profits. They are also struggling to convince investors that their renewable energy plans to achieve net-zero emissions by 2050 will yield the same profits as oil and gas currently does. And so to keep investors in their corner, Big Oil is betting that generosity is the way forward.
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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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