By Sarah McFarlane
Major oil companies are working hard to articulate a vision for
their future, but the energy sector's poor performance shows that
many investors aren't buying it.
Companies including Royal Dutch Shell PLC, BP PLC and Total SA
have launched plans to turn themselves into lower-carbon
businesses. But with low oil prices pressuring the industry's
economics and many investors saying it is too early to know whether
the intended transformations will generate significant returns,
there is growing skepticism on Wall Street over the sector's
"Just saying that you're going to start a transition doesn't
mean you're going to be successful at it," said Fabiana Fedeli,
global head of fundamental equities at Netherlands-based Robeco
Institutional Asset Management B.V.
Major oil companies have limited room to maneuver after last
year's lower oil and gas prices hit earnings -- and there is no
relief in sight with oil prices down 16% since the start of the
year after the coronavirus curbed demand. Energy companies are also
under pressure from an expectation that U.S. shale's ability to
quickly adjust supply will cap prices over the longer term.
The uncertainty has made investors skeptical about whether
companies can boost profits and transform through new investments
while paying out hefty dividends.
Energy has been the worst-performing sector of the S&P 500
for the past decade. "Valuations are telling us that investors are
losing confidence in the oil and gas sector," said Nick Stansbury,
head of commodity research at the U.K.'s largest asset manager
Legal & General Investment Management.
In December, the initial public offering of Saudi Arabian Oil
Co., known as Aramco, mostly attracted domestic and regional
investors. Many institutional investors outside the country passed
on the world's largest listing, finding it too expensive, people
involved in the IPO said.
In another blow to the sector, some investors say some
companies' transformation plans don't go far enough. On Shell's
latest earnings call last month, Chief Executive Ben Van Beurden
made almost as many references to the energy transition and the
company's small low-carbon businesses as he did to oil and gas.
But Sarasin & Partners LLP, a U.K. asset manager, sold
around 20% of its stake in Shell last summer, expressing
displeasure with the company's plan to increase fossil-fuel output
over the next decade, in an open letter to Shell's chairman.
"We were extremely disappointed that, despite your public
commitment to act on climate change, [Shell] aims to deliver rising
fossil fuel production to at least 2030. We do not view this as
aligned with the Paris agreement," the letter said.
The company has invested $2.3 billion in what is known as new
energies, including wind and solar power, since 2016. Over the same
period, it spent about $35 billion on its traditional business of
exploring for, and producing, oil and gas.
Shell's share price has fallen by about 25% in the past
Another sign that oil stocks are falling out of favor: The
dividend yields of companies including Shell, BP, Exxon Mobil Corp.
and Norway's Equinor ASA have been rising. The higher yields are
partly the result of falling stock prices. Some companies,
including BP and Equinor, have raised their dividends in recent
While shareholders benefit from high dividends, the companies'
ability to maintain or raise dividends is at risk if oil and gas
prices remain low and keep earnings under pressure.
Most energy companies pride themselves on preserving their
dividends. Exxon has increased its dividend annually for the past
37 years. Shell hasn't cut its dividend since World War II.
"Lowering the dividend is not a good lever to pull if you want
to be a world-class investment case so [we're] not going to do
that," said Shell's Mr. Van Beurden.
Last year, the weighting of oil-and-gas companies in
factor-based indexes -- which enable investors to add exposure to
particular attributes of a stock, such as growth and value -- fell
in every category, including yield, value and profitability,
according to data from global index provider FTSE Russell.
Shrinking company valuations also meant the proportion of energy
stocks in the S&P 500 fell to 4% in January, its lowest in at
least three decades, having peaked at over 14% in 2009.
Investors have also stopped rewarding the energy sector for
amassing reserves of crude, in a sign that climate concerns are
altering the way markets value oil companies.
A study published by the National Bureau of Economic Research
found that investors view undeveloped crude reserves as a reason to
discount a company because of the risk that climate policies will
curb future oil demand and leave some resources permanently
underground and worthless.
"I definitely think there will be some resources left in the
ground from a carbon-footprint perspective," said Eldar Sætre, CEO
of Norway's energy giant Equinor, speaking to The Wall Street
Journal at a recent event in London.
Write to Sarah McFarlane at email@example.com
(END) Dow Jones Newswires
February 24, 2020 10:48 ET (15:48 GMT)
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