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The expected recovery would build on a surprisingly strong performance in the first quarter and further support the oil and gas industry’s efforts to repay debt and reward investors.
“Big oil companies”, referring to the world’s biggest oil and gas companies, however, still face significant challenges and uncertainties.
These include the remarkable success of shareholder activism in recent months, a “tremendous degree” of continued investor skepticism and increasing pressure to massively reduce the use of fossil fuels in order to meet the demands. of the climate emergency.
“Europe’s integrated oil sector has already posted surprisingly strong first quarter earnings, but the second quarter is expected to improve further as commodity prices have risen further,” Morgan Stanley analysts said in a research note. .
Futures on international benchmark Brent crude averaged $ 69 a barrel in the second quarter, the Wall Street Bank said, compared to an average of $ 61 in the first three months of the year. The oil contract was last seen at around $ 73.57.
“The energy transition poses a lot of uncertainties for investors, and the sector’s track record of capital allocation has been mixed at best over the past decade. Therefore, investors only value the cash flows that are paid to them, with little credit for the cash flows kept within companies. , ” they said.
“As the dividend outlook has not improved much and dividend yields overall are already low by historical standards, stock prices have been significantly below earnings outlook. “
In Europe, Royal Dutch Shell and TotalEnergies will release their second quarter results on July 29, while BP is expected to follow on August 3. In the United States, ExxonMobil and Chevron are expected to release their latest figures on July 30, while ConocoPhillips will release the second. quarterly results on August 3.
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This is “mainly due to the much higher oil prices,” he added. “In addition, the majors, large and mid caps maintained capital discipline and continued to focus on paying down debt and increasing free cash flow instead of increasing business. [drilling and completion] despite rising oil prices. “
Santos said that S&P Global Platts Analytics is also forecasting an increase in reporting on ESG activity, noting that “it appears that pressure from environmental groups and fear of more regulations from the current administration is persuading many companies to do more to reduce emissions ”.
Growing climate risk
Oil prices have since rebounded to multi-year highs, and the world’s three major forecasting agencies – OPEC, the IEA and the US Energy Information Administration – now expect an economy-led recovery. demand accelerates in the second half of 2021.
Clark Williams-Derry, energy finance analyst at IEEFA, a nonprofit, said he expects oil and gas companies to try to claim a healthy health record after a second quarter record. “This is the mantra we will hear,” he told CNBC over the phone.
However, while the energy majors will likely have had an opportunity to repay some of their debt after generating a significant portion of cash from their operations, Williams-Derry said this masks the fact that these companies have not much invested in future production.
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Longer-term, Williams-Derry warned that there is a “huge degree” of investor skepticism about the business models of oil and gas companies, citing the worsening climate crisis and the urgent need to s ” keep away from fossil fuels.
“We saw signs earlier in the year of a drastic shift in investor thinking about, frankly, the legal status of some of the supermajors,” he said, referring to a series of landmark losses. in courtrooms and boardrooms for companies like Royal Dutch Shell, ExxonMobil and Chevron.
“So even if you go high for a quarter or two when prices are high, the reality is still that stock prices are way below the market as a whole and there just isn’t the enthusiasm of investors. for the old business model that I think these companies were probably expecting to see, ”he said.
“Investors are looking to the future and will be looking beyond an increase in near-term earnings from the dismal second quarter results of last year,” Hipple said. “They want to see concrete business strategies that recognize the accelerating energy transition. “
“Oil companies that ignore the climate in their profit calls will be seen as laggards. Long-term investors will conclude that they are financially risky, ”Hipple said.