It is a tough time to be in the oil and gas sector. In the third quarter of 2019, lower oil prices, weaker global demand, contracting chemicals industry margins and volatile equity markets have all had their impact. Add in a highly-vocal and increasingly demanding tussle with the green lobby into the mix and it’s no surprise that oil majors like BP and Royal Dutch Shell are facing something of an identity crisis as well.
This week we hear from both of these companies. First up was BP, which has today revealed that it made a loss in the third quarter. It came in $749 million down for the three months to September. Over the same period last year it turned in a profit of $3.3 million.
The company’s underlying replacement cost profit, which is BP’s definition of net income and is also a closely-watched measure used to gauge performance, came in at $2.3 billion, well below the $3.8 billion a year earlier. But that is ahead of analysts’ estimates, which were penciled in at just $1.7 billion.
Underlying upstream production was also down, coming in 2.5% lower than a year earlier, reflecting maintenance across a number of regions and weather impacts in the US Gulf of Mexico, the company said.
BP declared a dividend of 10.25 cents a share for the quarter. And this will be closely watched by so many investors who rely on the likes of BP and Shell (the biggest dividend-payer) to bolster the income part of their investment portfolio.
And this is where the real trouble lies for the oil majors today. As companies that generate most of their profits by meeting the world’s demand for oil and gas, how do they navigate the future when the tide is rapidly turning against fossil fuels?
Shell chief executive Ben van Beurden has acknowledged it is a real problem. He says it comes down to finding “a way to preserve that dividend-paying capacity, while at the same time growing the value of the company, while at the same time also changing the make-up of the company.”
Today BP said it was reassessing the carbon intensity of its portfolio. has already announced asset sales worth $7.2 billion by the end of the third quarter and now expects to hit the $10 billion by the end of 2019. But this is largely to strengthen its balance sheet after a blockbuster deal for miner BHP’s US shale assets in 2018 — its biggest acquisition in almost 20 years.
Analysts have been focused on the company’s debt levels since the BHP deal. Gearing — the ratio between debt and BP’s market value — was at nearly 32% in the third quarter, making it one of the highest in the sector. BP said that would remain above its target 20% to 30% range throughout 2019 as well, which some analysts warn could really hinder its ability to return cash to shareholders in the form of increased dividends and buybacks. And that is certainly not what incomer-seekers want to hear.
But we can probably expect more of the same on Thursday, when Shell gives its third quarter update. It has already started to embrace the shift away from fossil fuels; developing wind and solar-power projects, encouraging the adoption of hydrogen electric energy and investing in low-carbon start-ups —from electric vehicle charging to home energy storage.
It’s also been prioritising its gas business (which is cleaner than crude but admittedly still a fossil fuel), focusing on higher-margin and less carbon-intensive barrels and chemicals (made without combusting oil).
And it has, so far, been keeping investors sweet by returning cash to shareholders, with plans to buy back at least $25 billion of its shares by the end of 2020; although that is dependent on further progress with the group’s debt reduction programme and oil price conditions in general.
The company also announced an interim dividend of 47 cents a share, which is the same as last year’s payout.
However, we will have to see what Shell has to say this time around. In the second quarter alone, earnings fell 42% year-on-year to just over $3 billion.
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