What to expect as Big Oil releases second quarter results – .

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What to expect as Big Oil releases second quarter results – .


An oil pump cylinder operates at the Inglewood Oilfield in Culver City, California, United States on Sunday, July 11, 2021.
Kyle Grillot | Bloomberg | Getty Images
LONDON – Oil and gas majors are expected to report second quarter windfall profits in the coming days, energy analysts told CNBC, after a brutal 12-month run by virtually every measure.
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.

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.

Kathy Hipple

Professor of Finance at Bard College

Morgan Stanley analysts noted that stock prices of major energy companies continue to be anchored in their dividend distributions. Despite substantial increases in free cash flow forecasts, the bank said Big Oil’s dividend expectations remain “rather static.”

“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.

Fuel prices on a sign at a BP gas station in Louisville, Kentucky on Friday, January 29, 2021.

Luc Sharrett | Bloomberg | Getty Images

Rene Santos, North America sourcing manager at S&P Global Platts Analytics, told CNBC via email that he expects second-quarter profits for US-based energy companies to be “ considerably higher ”compared to the same period in 2020.

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

The oil and gas industry was plunged last year as the coronavirus pandemic coincided with a historic shock in fuel demand, falling commodity prices, unprecedented depreciations and tens of thousands of cutbacks. ‘jobs. The torrent of bad news prompted the head of the International Energy Agency to suggest it could be the worst year in the history of oil markets.

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.

Members of the environmental group MilieuDefensie celebrate the verdict in the Dutch environmental organization’s case against Royal Dutch Shell Plc, outside the courthouse of the Courthouse in The Hague, The Netherlands, Wednesday, May 26, 2021. Shell has been ordered by a Dutch court to slash its emissions stronger and faster than expected, dealing a blow to the oil giant that could have far-reaching consequences for the rest of the global fossil fuel industry.

Peter Boer | Bloomberg | Getty Images

“What I think the market is starting to report is that they like it when oil companies contract and don’t go into new production, but use the money their operations generate to pay back the cost. debt and reward investors. “

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.

Energetic transition

Kathy Hipple, a finance professor at Bard College in New York City, told CNBC via email that she believes two key themes are likely to emerge this earnings season: addressing investor concerns about climate risk and defining new business models to survive a pivot towards renewable energies.

“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. “

She argued that it was important to note that these revenues will be announced “against a backdrop of climatic disasters around the world”, from extreme heat in the Pacific Northwest to flooding in Europe and China.

“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.

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