Big Oil’s Record Returns Fail to Lure Back Investors

The oil and gas sector is paying record returns to shareholders, but that's not enough to win back investors

by Victor Adetimilehin

Oil and gas giants are paying out more money than ever to shareholders, but that’s not enough to restore their appeal in a world shifting to cleaner energy sources.

The top five Western oil and gas companies – BP, Chevron, Exxon Mobil, Shell, and TotalEnergies – returned over $111 billion to shareholders in 2023, according to Reuters calculations. That was slightly higher than the $110 billion they paid out in 2022 when their profits soared to a record $196 billion after energy prices spiked following Russia’s invasion of Ukraine.

Yet their share prices have lagged behind the broader market, as investors remain wary of the sector’s long-term prospects amid the global transition to low-carbon energy and the uncertain demand outlook for fossil fuels.

A transatlantic divide

The global oil and gas industry has faced growing pressure from governments, activists, and consumers to reduce its greenhouse gas emissions and align with the goals of the Paris climate agreement. Some companies have responded by investing more in renewable energy sources, such as wind and solar, while others have focused on maintaining their core oil and gas business.

This has created a clear transatlantic divide in strategies, with Chevron and Exxon prioritizing oil production growth, while BP, TotalEnergies, and Shell allocating a higher proportion of capital to low-carbon and renewables.

But the message to investors on returns has been largely consistent across the board: stick with us and we’ll reward you.

“We’re very much focused on ensuring we have a compelling distribution to our shareholders,” Shell Chief Financial Officer Sinead Gorman told investors last week, promising “complete predictability” over returns.

Shell, Chevron, and TotalEnergies increased their dividends in the fourth-quarter results, while BP increased the rate of its buybacks. Exxon returned $32 billion to shareholders last year, the sector’s highest.

A disciplined approach

The generous payouts reflect a more disciplined approach to spending and balance sheet management, as the industry learned from the mistakes of the past when it splurged on costly mega-projects that eroded shareholder value.

The sector is expected to make minimal spending increases in 2024, according to Tobias Wagner, Vice President, and Senior Credit Officer at Moody’s Investors Service.

“Companies are being more selective and investments face greater hurdles in terms of returns, emissions, and regulations,” Wagner said.

“The credit quality of the sector has improved with more upgrades than downgrades in recent years also reflecting discipline in maintaining balance sheet strength and flexibility,” he added.

A sustainable future?

Despite the improved financial performance and shareholder returns, the oil and gas sector still faces significant challenges and uncertainties in the long run.

The International Energy Agency (IEA) warned last year that the world needs to stop investing in new oil and gas projects by 2021 if it wants to reach net-zero emissions by 2050, a scenario that would require a radical overhaul of the global energy system.

While some analysts and investors doubt the feasibility and desirability of such a drastic shift, others argue that the oil and gas sector needs to do more to prepare for a lower-carbon future and avoid being left behind by the energy transition.

“The oil and gas industry is at a crossroads,” said Luke Parker, Vice President of Corporate Analysis at Wood Mackenzie, a consultancy.

“It can either embrace the changes that are coming and be part of the solution, or it can stick to the status quo and be part of the problem,” he said.

Some signs of hope are emerging, as the industry is increasingly engaging with stakeholders and collaborating on initiatives to reduce emissions, such as carbon capture and storage, and hydrogen, and methane abatement.

The global oil and gas sector also has a vital role to play in providing affordable and reliable energy to billions of people around the world, especially in developing countries where access to electricity and clean cooking fuels is still lacking.

By balancing its short-term returns with its long-term resilience, the industry can demonstrate its value and relevance in a changing world.

Source: Reuters

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