Big Oil arrives a new season of blockbusters, with the second consecutive quarter of top-down stellar growth. According to the latest data from FactSet, the revenue growth rate of 2.221 in the energy sector of 24.9% was much higher than the Wall Street estimate of 19.4%, while the sector reported gains of 15,900 million dollars compared to a loss of -10.6 billion dollars in Q2 2020. the best Y / Y improvement of any of the S&P 500The 11 market sectors.
Interestingly, the Big Oil duo of ExxonMobil (NYSE: XOM) i Chevron Corp.. (NYSE: CLC) greatly appreciated the outstanding performance, with the combination of the two for $ 13.9 billion of the industry’s $ 26.8 billion annual earnings.
Not surprisingly, most major oil and gas companies have used their cash boom to reward shareholders with higher dividends and rewards.
Chevron, Marathon oil (NYSE: MRO), Equinor ASA (NYSE: EQNR) i Royal Dutch Shell (NYSE: RDS.A) Announces Dividend Rises During Last Call of Earnings ConocoPhillips (NYSE: COP) i BP Plc (NYSE: BP) have reinstated the repurchase of shares after their earnings.
But contrary to Wall Street’s expectations, Big Oil’s cash reward, including fat dividends, has failed to impress investors, a pretty surprising development in a market with no returns.
There is a method to madness, however.
Kathy Hipple, a finance professor at Bard College in New York, has told CNBC that Big Oil’s bid to attract investors with cash rewards is unlikely to work for long-term investors.
Dividend traps
Companies in all sectors typically use dividends and stock repurchases to make their shares more attractive to investors.
For most companies, dividend payments act as a token shareholder reward for their investment. However, oil companies are especially adept at getting these symbolic rewards and Big Oil has some of the most impressive returns in the business.
ExxonMobil currently has a dividend yield of 6.60% (Fwd); Chevron yields 5.68%, BP 5.56%, Shell 5.01%, while MPLX LP (NYSE: MPLX) recorded a return of 10.01% fwd.
Meanwhile, stock repurchase is designed to increase a company’s profits, which is ultimately reflected in its share price.
Still, Hipple says that while a 10% yield may act as a powerful magnet for the middle-income investor, experienced and long-term investors don’t fall in love because they consider oil and gas companies as dividend traps with a date approaching each day.
“Once institutional investors determine that demand has peaked (which has probably already happened), they will leave the sector for good. Many have already done so, depending on the performance of the sector’s shares in recent years.. “
Blocked assets
Hipple said long-term smart investors will continue to shun major oil and gas companies “unless” until “they fully recognize the climate crisis because of the real risk of stranded assets.
“These investors understand that major oil companies continue to invest tens of billions in unnecessary oil and gas infrastructure, ignoring IEA conclusions that no additional infrastructure can be achieved. [degrees Celsius] stage. These investments are likely to turn into foreclosed assets and investors do not want to be left with the stock market. “
Surely there is a valid point here.
Last week, the Intergovernmental Panel on Climate Change gave its most intense warning about the deep-seated climate emergency, saying a key temperature limit of 1.5 degrees Celsius could be broken in just over a decade in absence of immediate, rapid and large-scale reductions. in greenhouse gas emissions.
UN Secretary-General António Guterres has described the report’s findings as a “red code for humanity,” saying that “a death knell must sound“for fossil fuels.
It is true that American slate companies are exercising much more capital discipline than in the past. Shale drills have a history of comparing their capital expenditures with the strength of oil and gas prices; However, Big Oil is abandoning the old game book this time. Rystad Energy says that while oil sales, cash from operations and EBITDA for tight oil producers are likely to set new record highs if the WTI averages at least $ 60 a barrel this year. year, capital spending will only see sluggish growth, as many producers pledge to maintain operational discipline.
However, most of these investments continue to flow towards the development of new oil and gas assets, with a tiny fraction towards sustainable energy.
Hipple is barely alone in her dim view of the old oil and gas companies.
“Frankly, we don’t think this is very good business. With oil companies, we still don’t think they represent good companies in the long run. They do not generate constant returns on capital or cash flow, although at the moment they seem to be in a pretty good place,“David Moss, head of European equities at BMO Global Asset Management, told CNBC.
Moss, in particular, fails at major European energy companies that currently generate “very strong” cash flows amid a sustained rise in oil prices, but many choose to keep a tight cap on spending rather than invest in sustainable energy.
It looks like Wall Street is making a 180-pound and increasingly bearish pace on oil and gas.
In a recent report, Standard Chartered says Wall Street is wrong in its expectations of high oil prices because “…a significant amount of money has already entered the market according to the belief generated by Wall Street (wrong according to our analysis) that the balances are much tighter and justify between 80 and 100 dollars / bbl. “
By Alex Kimani for Oilprice.com
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