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Earnings season in oil and gas has begun, and expectations are much different from what they were just three months ago. Oil prices are stronger, and the outlook for demand is more positive even though uncertainty remains. No wonder, then, that expectations about financial reports are brighter. However, challenges remain.

Strong cash flows

Oil producers should report a substantial increase in free cash flow both on a quarterly basis and on an annual basis, according to Troy Vincent, a market analyst at DTN. Vincent also told Oilprice that companies would likely use that higher free cash flow to pay down debt and prop up their balance sheets.

Surprises are possible, mostly in production growth and spending plans but are not very likely, according to Vincent. Like other industry observers and insiders, Vincent noted that the industry is still taking a guarded approach to the future, likely to focus not on production growth at all costs but on sustainable production growth.

“While there may be a few surprises by way of companies announcing stronger production growth expectations and capital spending than in Q4 in light of the strength of the global demand recovery, Q1 earnings should continue to reflect an industry that is more focused on sustainable production growth and returns to shareholders rather than rushing to drill and complete wells (particularly in the US shale patch) as fast as possible as prices rise,” Vincent said.

The Freeze effect

The positive news from above is largely a result of the slow return to normal, where normal means higher oil prices make for higher company profits. Yet this quarter featured, besides higher oil prices, the Texas Freeze, which paralyzed the United States’ oil heartland and removed thousands of barrels in oil production from the market as well infrastructure froze.

Shell has already warned that its first-quarter figures will be affected by the Texas Freeze. The impact will be to the tune of up to $200 million, the supermajor said in a first-quarter update. Of this total, the damage would be up to $40 million on the upstream segment, up to $80 million on oil products, and around $60 million on the chemicals business, Shell said earlier this month.

Exxon also warned about the Freeze’s impact on its earnings for the first quarter. This impact will be much larger than Shell’s, at $800 million. However, it would be offset by the strong performance of its main business divisions, driven by stronger oil and gas prices.

Generally speaking, everyone involved in oil production and refining in Texas is likely to suffer some damage from the February Freeze, with its size depending on the size of the company’s exposure to the state’s oil and gas industry.

The investor challenge

While the losses suffered from the Texas Freeze are now in the past and a one-off event, oil companies this quarter are facing a trickier challenge: convincing investors they are on the right track.

A lot of attention has been given to decarbonization efforts and how oil and gas is allocating capital to alternative businesses,” says Mitch Fane, EY U.S. Oil & Gas Leader. “Companies will need to display tangible actions to decarbonize and must align with a larger strategy that demonstrates financial discipline and strong returns, as this will be important for their access to capital going forward.”

While not all investors and oil and gas belong to the ESG wave, the sheer amount of attention that decarbonization is getting these days makes it a priority. Also, the fact that all Big Oil majors have—albeit forcedly—committed to lowering their emissions footprint means that the ESG investors are gaining strength, as evidence by more climate-related resolutions being drafted for this year’s annual general meetings.

Financial agility

Agility in finance is the other thing we can expect to hear on conference calls this month and next as the oil industry reports first-quarter results. With the pandemic and the renewables push, things are no longer as simple as “Drill when oil’s high, stop when it’s low.”

Now, after surviving a brutal 2020, oil and gas companies will need to continue prioritizing capital discipline and betting on the best assets only. This was already made evident during last earnings season, and despite the tangible improvement in both oil prices and demand outlook since then, chances are the priorities will remain unchanged.

“Though the timing is unclear, the resolution of the pandemic is in sight,” EY’s Fane told Oilprice. “Vaccine distribution continues to make a significant difference in countries around the world, and oil and gas demand has recovered substantially. But long-term uncertainty and stakeholder pressure has forced companies to continue capital discipline and prioritize spending on critical assets and short-cycle projects. Investors will want to see how agile oil and gas companies can be as decarbonization and the energy transition gain momentum.

It seems that according to analysts, surprises are quite unlikely this season. Oil companies will post stronger results than last quarter’s on the back of the combination of vaccine drives, economic improvement in key markets, and OPEC+’s continued control of production.

OilPrice, by Irina Slav, May 3, 2021

Aramco and SABIC plan to transfer the marketing and sales responsibility for a number of Aramco petrochemicals and polymers products to SABIC, and the offtake and resale responsibility of a number of SABIC products to Aramco Trading Company (ATC).

The effect of these changes, planned to be implemented on a phased basis during 2021, will focus SABIC on petrochemicals products and ATC on fuel products. 

This is a significant step in aligning the Aramco and SABIC strategies, following Aramco’s acquisition of a 70% stake in SABIC in June 2020.

Aramco and SABIC will continue to review options for further global marketing and sales transfers across product-producing companies within the Aramco group portfolio.

In a statement to press, Saudi Aramco wrote that this would “drive further operational efficiencies, strengthen the brands of both companies and their combined products and services offering, and help to maintain competitiveness.”

Ibrahim Al-Buainain, Aramco Trading Company president and CEO, said: “The transfers reflect our shared commitment to capitalise on the complementary nature of Aramco and SABIC’s respective product portfolios as we strive to create added value for our customers and shareholders.

“Together, Aramco Trading Company and SABIC are focused on providing a world-class products and services offering. These changes will place us in an even stronger position to deliver market-leading innovation and value.”

Abdulrahman Al-Fageeh, SABIC executive vice president for petrochemicals, said: “By leveraging and optimising our complementary combined product portfolios we will create a one-stop shop for the benefit of our customers globally, including in strategically important geographies, especially across Asia.

“These marketing and sales transfers and operational changes are intended to put us closer to market, driving greater agility and flexibility to deliver added value to customers and power their ambition.”

Oil&Gas, by Carla Sertin, May 3, 2021

An oil pump and a wind turbine in Austria. Shell is navigating a narrow path to reach its net-zero goal, according to a senior executive.

Oil and gas majors are under growing scrutiny to deliver on their climate pledges, with some investors and industry analysts still unconvinced that their transition can both deliver shareholder value and make a meaningful dent in reducing the pollution caused by their products.

Royal Dutch Shell PLC presented a strengthened climate plan to its shareholders in February, acknowledging for the first time that it will need to eliminate or offset all of its emissions — including those generated when its fuels are burned, which make up the bulk — to reach its 2050 net-zero goal.

But executives acknowledge that the company is treading a fine line between building new low-carbon businesses while still investing in the oil and gas assets that will help fund the transition. For Shell and its peers, that also means courting sustainability-conscious investors looking to deploy a rapidly growing pool of environmental, social and governance-linked funds while retaining traditional shareholders who are worried about lower returns in sectors like wind and solar.

“It’s the narrow path, I think, that we can navigate this energy transition highly successfully as a company. Our job is to persuade the investors and persuade civil society at large that we have got the right strategy in order to deliver on all of those different objectives,” Ed Daniels, Shell’s executive vice president of strategy and portfolio, said in an interview. “It’s not a trivial exercise.”

Europe’s other oil majors, from BP PLC and Total SE to smaller integrated producers like Eni SpA and Repsol SA, have also stepped up their climate targets and are trying to convince shareholders of their low-carbon strategies. Both BP and Total used recent investor calls to give deeper insight into their green energy businesses, for example. Aside from buying and building large-scale wind and solar parks, the majors are also betting on everything from biofuels, batteries and hydrogen to carbon-capture technology and planting trees to reach their targets.

Most U.S. oil and gas companies, including Exxon Mobil Corp. and Chevron Corp., have also started to address investor concerns around climate change but have so far stopped short of setting the kind of comprehensive emissions-reduction targets embraced by many of their European peers.

In an industry first, Shell will put its own net-zero transition plan to its shareholders for an advisory vote at the company’s next AGM in May. The plan, first released on April 15, will be updated every three years, although shareholders will vote on Shell’s progress annually. Should they disapprove, then “of course we would have to change,” Daniels said.

“We have to take that extremely seriously,” he said. “Now, the reality is these are large, complex, multidimensional problems. And I think if there was an easy single prescription for our company or any other company to fix [the] energy transition then we would have found it by now.”

Tentative endorsement

Observers inside and outside the industry are watching the result of the vote closely as a bellwether for the wider sector, amid lingering concerns over companies’ ability to marry climate and financial targets.

“Our concern is that Shell moves towards lower returning/lower value businesses, leaving behind viable activities too soon,” analysts at UBS said after Shell laid out its net-zeroplan. “The transition strategy needs to be judged on its economic merits as well as its environmental/ESG ones.”

A group of environmental organizations already wrote to investors engaging with Shell in February to urge them to vote against the transition plan, criticizing Shell for not setting any targets for absolute emissions reductions before 2050. Its intensity targets theoretically allow Shell to raise hydrocarbon production if it balances out the additional emissions with low-carbon activities.

Kelly Trout, a senior research analyst at Oil Change International, one of the climate groups that signed the letter, said companies’ actions by 2025 and 2030 are the “true test” of their climate commitments. “This is the critical decade,” Trout said.

Shell said in February that its carbon emissions and oil production had already peaked, but the company plans to increase its gas output until 2030. BP, for example, has said it will cut its oil and gas production by 40% until then.

At least one outspoken investor has already endorsed Shell’s plan. Adam Matthews, chief responsible investment officer at the Church of England Pensions Board, said in a statement that the asset manager would likely vote in support of the strategy. Matthews co-leads engagement with oil majors on behalf of Climate Action 100+, an influential investor group with $54 trillion in assets.

Dutch asset manager Robeco Institutional Asset Management BV, the other co-leader, declined to comment on its voting strategy. A spokesperson said that Climate Action 100+ will continue to engage with Shell, specifically on getting the company aligned to the net-zero benchmark it recently launched, which found oil companies lacking on several fronts.

Follow This, a small activist investor with stakes in all the big oil companies, also plans to keep filing shareholder resolutions to ask companies including Shell to set quantitative targets for emissions cuts.

Writing on the wall

In the meantime, not everyone is sticking around to see how the transition plays out.

Sarasin & Partners, a London-based investor managing £17 billion in assets, decided to sell its holdings in Shell, BP and Total in 2020 because it saw too much financial risk in the companies’ hydrocarbon businesses. The decision followed several years of lobbying by Sarasin to get the majors to set climate targets and lower their oil price forecasts.

“There were potentially rather material but invisible stranded assets within all of these companies’ balance sheets,” Natasha Landell-Mills, a partner and the head of stewardship at Sarasin, said in an interview. “But it was impossible to know how large those write-downs would be.”

Over the past five quarters, eight of the largest integrated majors have collectively made write-downs of more than $100 billion, according to figures compiled by the International Energy Agency. The organization said that while the coronavirus pandemic and falling oil prices were behind some impairments, the accelerated shift to a lower-carbon economy also played a part, particularly for the European majors.

“The writing’s on the wall. We decided that was not a risk worth taking for our clients,” Landell-Mills said.

Analysts have already flagged rising risk in the industry. S&P Global Ratings in January changed its risk outlook for the integrated oil and gas sector from intermediate to moderately high, citing, among other factors, the impact of the energy transition.

The rating agency has since downgraded Shell, Total, Chevron and Exxon; Moody’s followed in March by knocking a notch off Exxon, Total and BP.

“We have this gathering storm cloud on the horizon, which many of these companies are explicitly already recognizing with changes in their strategy. But that’s having an impact today,” Simon Redmond, a senior director at S&P Global Ratings, said in an interview.

“There is a clear risk that either companies move too quickly to embrace or address energy transition issues, or indeed they move too slowly. And equally, there’s a challenge to make sure that the investment is proportionate and indeed profitable,” Redmond said.

Shell’s Daniels said the balance between shareholder returns and climate action will continue to be a key focus for the company.

“We need to be able to show that we’re building new businesses that will start to replace the cash flows that we currently get from a hydrocarbon-based economy,” he said. “The reality is that the easiest way that we could become a net-zero emissions company [is to] do it overnight by simply shutting the whole machine down. Now, of course, that would fail tragically in terms of the ability of our company to deliver cash flows to shareholders.”

While Landell-Mills gives Shell and other oil companies some credit for responding to investor concerns and starting to move in the right direction, she said their shift is just not happening fast enough.

“Climate change is not a relative game and, at the end of the day, you have to get to net-zero,” she said. “And none of them are really on a clear pathway to get there.”

S&P Global, by Yannic Rack, April 26, 2021

Oil prices moved higher this week after the demand outlook improved. While Covid cases are up significantly from a few weeks ago, and travel restrictions have proliferated, demand still looks strong and on the rise. 

IEA raises oil demand forecast. The IEA raised its oil demand forecast for 2021 by 230,000 bpd, citing improving vaccination efforts and U.S. stimulus.

Exxon spends huge sums to defeat proxy moves. ExxonMobil (NYSE: XOM) is spending above $35 million to block proxy votes by activist shareholder Engine No. 1, and could spend as much as $100 million, according to Reuters, although Exxon disputes that figure. Analysts say it could become one of the biggest proxy fights in history. 

New Zealand becomes first country to require climate disclosure. New Zealand became the first country to require banks, insurers and investment managers to report the impacts of climate change on their businesses. The law affects banks and insurers with assets over NZ$1 billion, and all equity and debt issuers listed on the country’s stock exchange.

Oil majors’ struggle to sell $110 billion in assets. Large oil and gas companies are looking to sell off a combined $110 billion in assets to raise cash and pay down debt. But they may struggle to find buyers, according to Reuters. “This is not a very good time to sell assets,” Total (NYSE: TOT) CEO Patrick Pouyanne said.

California fracking ban dies in state legislature. A proposal to ban fracking statewide in California fell short in the state legislature this week. 

Bitcoin power consumption jumped 66-fold since 2015. Energy consumption for Bitcoin mining is up 66 times and the associated emissions are destined to receive greater scrutiny, Citigroup warned. Bitcoin uses more energy than the entire country of Argentina. The New York Times also did a deep dive on the issue.

Chevron invests in offshore wind for first time. Chevron’s (NYSE: CVX) venture capital unit invested in Ocergy Inc.’s floating offshore wind turbines. “To my knowledge, this is the first investment by a U.S. oil major in offshore wind,” said Anthony Logan, a senior analyst at Wood Mackenzie Ltd.

Exxon cuts Guyana production due to compressor problem. ExxonMobil (NYSE: XOM) cut its Guyana oil production by 75% down to 30,000 bpd due to a problem with a compressor on its offshore platform.

BP halts production at Shetlands oil field. BP (NYSE: BP) suspended production indefinitely at its Foinaven crude oil field west of Shetland. 

Pioneer warns of price war if shale moves too fast. Pioneer Natural Resources (NYSE: PXD) CEO Scott Sheffield warned that OPEC+ would engage in a price war if U.S. shale grew production too quickly. “If we grow another million barrels a day next year, we’re going to have another price war in my opinion going into ‘23,” he said.

Exxon may exit Iraq’s West Qurna 1. Iraq’s oil ministry said that ExxonMobil (NYSE: XOM) may exit the West Qurna 1 oil field. The ministry said it is looking for buyers. Exxon operates the massive 500,000-bpd field. 

Investors around the globe looking for ESG. More than 80% of affluent investors in Hong Kong, China, Singapore and the UK say that environmental and ethical issues matter, and only a third have their investments tied to ESG factors, according to HSBC Asset Management. The data suggests there is an appetite for ESG investments.

WoodMac: Global energy transition to result in $10 Brent by 2050. Stricter climate policy could accelerate the energy transition, and a steep drop in demand could begin by 2023, according to Wood Mackenzie. Demand could fall to 35 mb/d by 2050, with Brent averaging between $10 and $18.

Goldman Sachs: Oil demand to peak by 2026. Goldman has been bullish on oil demand in the short run, but expects “anemic” demand after 2025 and a peak by 2026.

Biden expected to propose 50% cut in GHG. The U.S. is hosting a virtual climate summit next week, and ahead of that meeting, the Biden administration is expected to announce a 2030 greenhouse gas reduction target of 50%. 

Report: 2035 100% EVs is possible. A new report shows that, with the right policy, it is technically and economically feasible for all new car and truck sales to be electric by 2035.

Shell opposes climate proxy vote. Royal Dutch Shell (NYSE: RDS.A) is pushing shareholders to oppose a climate resolution filed by activist investor Follow This. 

Shell warns of stranded assets. Royal Dutch Shell (NYSE: RDS.A) says that it will have produced 75% of its proved oil and gas reserves by 2030, and will produce only 5% after 2040.

North American oil bankruptcies hit 5-year high. Oil and gas bankruptcies in North America hit their highest first-quarter level since 2016, according to Haynes and Boone. There were eight bankruptcies in the first quarter. 

The largest U.S. gas driller wants methane regulations. EQT (NYSE: EQT), the largest natural gas driller in the U.S., called for stricter limits on methane. The Pittsburgh-based company supports Congressional efforts to repeal the Trump-era rollback on methane limits. 

Permian pipeline crisis. A few years ago, Permian drillers suffered price discounts due to inadequate pipeline capacity. Now they have the opposite problem: too many pipelines and not enough oil.

Oil Price, by Tom Kool, April 20, 2021

One of the world’s biggest independent oil traders has said it will invest at least half a billion dollars in renewables over the next three years as it prepares for a shift in the world’s energy mix.
 

The move by Geneva-based Gunvor, which has also promised a 40 per cent reduction in its carbon emissions by 2025, shows how big trading houses that make huge profits in the oil market want a bigger role in the energy sources of the future.

Gunvor has set up a new subsidiary called Nyera — or New Era in Swedish — to focus on renewable power as well as carbon capture and storage projects and alternative fuels including ammonia and hydrogen.

The unit will be given a minimum of $500m to back new projects, although Gunvor’s co-founder and chair Torbjorn Tornqvist said he expected a “substantially higher number” if it could attract co-investors.

“We expect the phone to start ringing,” he said.

Last year was among the best years on record for Gunvor and its rivals — a group that includes Trafigura, Mercuria and Glencore. They reaped huge profits from the volatility in global oil prices caused by the pandemic. Gunvor trades about 2.7m barrels of crude and oil products a day.

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As such, they have no plans to give up trading hydrocarbons. But they are conscious of the need to prepare for the looming shift to clean energy and scrambling to invest in renewable projects amid fierce competition from oil majors and utility companies.

Trafigura has set out plans to build or buy 2GW of solar, wind and power storage projects over the next few years. It expects to invest about $2bn by 2025 in partnership with a big infrastructure investor. Mercuria is ploughing $1.5bn into projects in North America with private equity partners and says over the next five years 50 per cent of its investments will be in renewables.

Gunvor and its rivals are betting their deep expertise in trading and moving energy around the world will help them juice the relatively low returns on offer from green investments.

“We are not abandoning oil trading,” said Tornqvist. “I think it is important to grow in both our traditional businesses as well as having an eye on the future and spend some our capital to invest in that future so we are ready.”

Gunvor has been expanding in natural gas and other low-carbon transition fuels such as liquefied natural gas, which now make up half its trading activity.

The company, which has already stopped trading coal, also said on Tuesday it was targeting a 40 per cent reduction in its operational emissions by 2025 against a 2019 baseline of 1.9m tonnes of CO2 equivalent.

It is also finalising an assessment of the indirect so-called scope 3 emissions in its supply chain and says by 2027 the fleet of its Clearlake Shipping subsidiary will be 100 per cent “eco-vessels” — or ships that surpass the statutory maritime environmental rules.

By Financial Times, April 21, 2021

Houston, We Have A Problem. Oil Reserves Have Fallen Below 10 Years

Big oil has a big problem. It’s running out of oil.

Years of under-investment in exploration and a decline in project development has blown a hole in the reserves of the major international oil companies (IOCs), a group that includes ExxonMobil, Chevron and Royal Dutch Shell.

The sun is setting on big oil as reserves continue to deline.

Since 2015 the average reserves of the oil majors has fallen by 25% to now stand at less than 10 years of annual production.

Reserves in the ground is a critical measure of an oil company with a decline seen as a negative by investors.

The worst interpretation of falling reserves is that it might be an existential threat to the long-term survival of an oil company.

“A Looming Challenge”

Citi, an investment bank, noted the industry-wide decline of reserves in a research note published last week under the headline: “Falling IOC Reserves A Looming Challenge”.

The basis of the bank’s analysis was a review of the latest annual reports of the oil majors to provide a full picture of oil and gas reserves across the industry as at the end of last year.

“That picture is one where reserve life fell yet again,” Citi said.

9.5 Years Of Reserves, Down 25%

“The IOC average of 9.5 years is now 25% below where the industry was prior to the oil price collapse in 2015.”

The bank said that while Securities and Exchange Commission measurements had some failings they provided a clear picture of an industry that is struggling to make itself competitive in a world of lower oil prices.

“There is no bypassing this relationship between reserves and earnings, hence we think analysis of reserves trends is a highly important indicator of the health of a business,” Citi said.

More exploration needed to boost oil reserves.

Arguments that reserves are less relevant in an industry facing a transition away from oil and gas misses the point that it is cash flow from oil which is paying for investment in new energy sources such as wind and solar.

“In the recent words of one IOC chief executive ‘black pays for green’ a reference to the 80% of CFFO (cash flow from operations) that is generated from oil and gas activities, and likely to still be more than 70% by 2030,” Citi said.

“A reserve life of under 10 years gives an important reference on these time frames.”

Citi said there were two clear groups forming across the oil sector with six IOCs tightly grouped around reserve life of around 10.5 years. They are: Total, BP, Chevron, ENI, ConocoPhillips and ExxonMobil.

There are three IOCs in another group (Repsol, Equinor and Shell) which have reserves around eight years.

Forbes, by Tim Treadgold, April 14, 2021

Saudi oil giant Aramco on Friday entered into a $12.4 billion deal with a consortium of investors led by EIG Global Energy Partners that would give the investor group a 49% stake in Aramco’s pipeline assets, the two companies said.

This is the first major deal by Aramco since its listing in late 2019 when the Saudi government sold a minority stake in the firm for $29.4 billion in the world’s biggest initial public offering.

The EIG-led group signed a lease and lease-back agreement with Aramco, acquiring the equity stake in the newly formed Aramco Oil Pipelines Co, with rights to 25-years of tariff payments for oil transported through Aramco’s crude oil pipeline network, it said in a statement. Aramco will own 51% stake in the new company.

EIG is a Washington, D.C.-based investment firm that has invested more than $34 billion in energy and energy infrastructure projects around the world.

“The transaction represents a continuation of Aramco’s strategy to unlock the potential of its asset base and maximize value for its shareholders,” Aramco said in a separate statement.

Aramco will at all times retain title and operational control of, the pipeline network and will assume all operating and capital expense risk, the companies said.

The transaction will not impose any restrictions on Aramco’s actual crude oil production volumes that are subject to production decisions issued by the kingdom.

Aramco’s Chief Executive Amin Nasser said “moving forward, we will continue to explore opportunities that underpin our strategy of long-term value creation.”

The two companies did not identify the names of other investors in the consortium.

Several bidders had participated in the deal process including Apollo Global Management and New York-based Global Infrastructure Partners (GIP).

U.S. asset manager BlackRock and Canada’s Brookfield Asset Management Inc had left the race, Reuters had reported on April 6, citing sources familiar with the deal.

The pipeline deal is similar to infrastructure deals signed over the last two years by Abu Dhabi’s National Oil Co (ADNOC), which raised billions of dollars through sale-and- leaseback deals of its oil and gas pipeline assets.

Aramco stake is preparing a so-called “staple financing” for its bidders – a financing package provided by the seller that buyers can use to back their purchase, sources have told Reuters previously.

Aramco said last month it was betting on an Asian-led rebound in energy demand this year after it reported a steep slide in net profit for 2020 on Sunday and scaled back its spending plans.

Reuters, by Saeed Azhar, April 14, 2021