Easwaran Kanason

Co - founder of NrgEdge
Last Updated: November 17, 2021
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Business Trends
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Depending on how you look at it, it is either a very bad time or a very good time to be an oil & gas company. With COP26 in Glasgow going on in full swing, the sole visible presence of the industry there was Australia’s Santos, although key executives did speak at some side events. Meanwhile, pledges and promises were made to halt public funding of international fossil fuel energy projects by the end of 2022, slash methane emissions by 30% through 2030 and deadlines for carbon neutrality by key oil producers and consumers. But while all that was going on, the supermajors were also announcing their third quarter financial results, which was pretty blockbuster, as soaring crude prices gave way to massive profits, and the industry probably collectively generated more cash since the Great Recession of 2007.

The question, then, is what do the likes of ExxonMobil and Shell and BP do with all that cash? Logically, with crude prices so high, it would be ploughed back as capital expenditure, as it was in previous boom cycles when megaprojects were sanctioned to capitalise on prices. But that cycle can be devastating. When oil was trading around US$100/b in the early 2010s, huge profits led to huge investment, with a massive capital spending upswing prompted by the emergence of onshore US shale plays and fears of energy shortages. That went well for a while. Then ended painfully as overproduction and a lack of cost control resulted in the 2015 crash. After a few years, crude prices recovered and oil majors returned to old spending habits, albeit with more discipline this time. But the world has changed. Not only through the tectonic global Covid-19 pandemic, but also the climate (literally). Spending on mega fossil fuel projects is no longer palatable, especially for a publicly-listed company in the West, as renewables and climate change mitigation measures take centre stage in the race to limit temperature increases to 1.5 degree Celsius from pre-industrial levels.

So, instead of channelling all their cash into projects, the supermajors of the world are instead sending them back to their shareholders in the form of dividends and share buybacks. This satisfies two points: it rewards existing shareholders who have been weary of poor returns over the last decade and it maintains the investment lustre of the company, especially as they start on the painful journey of transitioning from carbon emitters to carbon zero. Just ask ExxonMobil, which was kicked out of the NYSE Dow Jones index in 2020. Debt accumulated is also being paid off, with fiscal discipline replacing the Wild West years of wanton spending. And even if the supermajors are re-investing profits, they are doing so in preparation for the future – emphasising innovation and renewables, and (slowly) turning their back on fossil fuels.

ExxonMobil, for example, reported a massive 60% jump in revenue to US$73.8 billion, yielding net income of US$6.8 billion, which is a huge swing from a US$680 million loss a year ago. In response, it raised its quarterly dividend for the first time since 2019, maintaining its status as one of America’s few ‘dividend aristocrats’. ExxonMobil also announced a surprise stock buyback and locked in its long-term annual capex to the low US$20 billion range, down over 30% from the pre-pandemic range. Crucially, almost 15% of that budget will go towards low-carbon investments, a significant departure from its previous stance as ExxonMobil attempts to change its image as the poster child for championing fossil fuels. Which is just as well, since CEO Darren Woods was under fire at the US Capitol Hill for his role in climate change. Chevron’s CEO Michael Wirth was also being grilled. But at least Wirth can also take solace in the fact that Chevron managed to report a quarterly profit of US$5.7 billion, the highest in eight years with the US$6.7 billion in free cash flow being the highest ever on record. With that cash, Chevron is rewarding its shareholders with generous dividends, as it eyes expanding its share buyback programme, while reducing its annual capex by US$2 billion to US$12 billion, though without any firm new commitments on renewables and low carbon.

The opposite is true for Royal Dutch Shell. It too saw its cash flow rise to its highest level ever of US$17.5 billion, with net profits of US$4.13 billion and LNG singled out as a major contributor as natural gas prices in Europe and Asia spike due to shortages. Shell’s dividend programme continues, with some US$7 billion from Shell’s US$9.5 billion divestment of its Permian assets also to be distributed to its shareholders. But, despite all this financial success and one of the most ambitious plans to achieve carbon neutrality within the industry, Shell remains under fire. It has already had its carbon transition plan deemed as ‘not ambitious enough’ by Dutch courts, and now an activist investor, Dan Loeb’s Third Point LLC  wants to break Shell into two halves: a fossil fuels and a renewables company. CEO Ben van Buerden rejects this notion, asserting that ‘the energy transition is a transition, so you have to go from one to the other’ and an integrated setup like Shell’s is best-placed to achieve that. And it can show that. Unlike its American counterparts, Shell intends to spend less than half of its estimated US$20 billion capex on oil, with the bulk going to gas, renewables and clean power.

BP and TotalEnergies haven’t yet faced activist investors like Dan Loeb or ExxonMobil’s own fracas with Engine No. 1 that successfully replaced a quarter of its Board. But perhaps they don’t, since both European supermajors have been the most pro-active in embracing a carbon neutral future while stressing that ongoing fossil fuel exploitation must be continued as sustainably as ever to achieve that future. But even they are spending their excess cash rewarding shareholders. BP’s net profit of US$3.3 billion beat market expectations, with CEO Bernard Looney commenting that soaring global commodity prices had turned the company into a ‘cash machine’ and led to it announcing an additional US$1.25 billion share buyback scheme. In Paris, TotalEnergies reported a net profit of US$4.77 billion, five times what it reported last year. It didn’t adjust its dividend payout much and remained committed to buyback US$1.5 billion of shares in Q4, but announced no other new reward measures. Perhaps it doesn’t need to, since it was the supermajor that managed to maintain its dividend programme best over the disastrous time of the pandemic.

It is a story being repeated across the industry. From Norway’s Equior reporting a tenfold jump in net profits to Saudi Aramco’s record-setting US$30.4 billion in profits. That level of money is enough to keep the industry in the target hairs of civil groups and government accusing them of profiting off pollution, but that is also the money that will fund the future and lubricate the transition towards a cleaner future. Share buybacks and dividends will keep shareholders happy, and if shareholders are happy, then the supermajors of the world can be more comfortable to the drastic reorientation of their direction that is currently happening.

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Market Outlook:

  • Crude price trading range: Brent – US$80-82/b, WTI – US$78-80/b
  • Despite OPEC+ decision to maintain its current pace of supply increases in the face of a plea from US President Joe Biden, crude oil prices slid back as traders worried that OPEC+’s reticence would trigger countries to tap into their strategic reserves
  • The market is fretting about the viability of demand – even as the possibility of fuel switching over winter approaches – as indications such as crude inventory builds in the US and soaring Covid-19 cases in Europe raise questions on the health of consumption

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Royal Dutch Shell Poised To Become Just Shell

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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