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OPINION

Oil and gas's moment in the sun won't last

Oil and gas's moment in the sun won't last
April 8, 2021
Oil and gas's moment in the sun won't last

BP (BP.) has hit its net debt target a year ahead of schedule and shareholders could soon see the return of share buybacks. Other majors are also doing well, even up against the all-dominant tech companies. All in all, the sector is in far better shape than could have been expected a year ago. 

The positive noises coming from management teams is the polar opposite of what new Carbon Tracker research suggests is the long-term trajectory of the industry. The conclusion of the report ‘A Tale of Two Share Issues’, released on the last day of March, is that oil and gas companies have taken billions of dollars of shareholder money – through raises and floats – and largely thrown it away, even factoring in dividends. 

“[Since 2011] the energy sector delivered a -2.4 per cent annualised total shareholder return (TSR) compared with +11.7 per cent return for the [MSCI All Country World Index],” the report said, also comparing that loss with the 14.3 per cent annual TSR for renewables companies. 

Alongside the negative TSR, the proportion of raises done by these companies has tumbled, from 12 per cent in 2012 to less than 1 per cent in 2020.

Shareholders did not have much to show for their investments, the report said, with the $453bn in equity issued in aggregate by oil and gas companies dropping in value by $123bn in the 10 years to 2020. 

No wonder capital raising has slowed: the last time oil and gas issuances were over $40bn was 2016, excluding the Saudi Aramco float in 2019. It was down below $20bn in both 2019 and 2020. 

In response, companies have turned to lenders, while bond issuances have recently ramped up as well. A new report by the Rainforest Action Network (RAN) found banks had actually increased lending right until the second half of 2020, with the $751bn total estimate still above the 2016 and 2017 figures.

RAN said lending in the first half of 2020 was the highest seen in a six-month period in five years, even as some bank shareholders are pushing hard to get them to commit to (and stick to) Paris Agreement-aligned strategies. 

The question is how to judge the short-term implications of these kinds of numbers, because for 2021, oil and gas companies are doing well. BP boss Bernard Looney said its March quarter earnings were helped by a “very strong business performance” as well as its $4.7bn in asset sales. 

At the other end of the spectrum, investors in the Alternative Investment Market can still do well from big discoveries. Touchstone Exploration (TXP) climbed from 30p a year ago to almost 180p in February, although is back down below 100p after a disappointing update at the end of March.

The binary nature of punting on exploration was shown by Bahamas Petroleum (BPC) as well this year, which plummeted in February after its long-awaited Perseverance-1 well proved less impressive than hoped. 

Despite short-term positives, it is hard to ignore the lessons of the past 10 years. Investors go for explorers because they could win big, knowing they could disintegrate from one bad update. Yet as for the majors, a short-term boost to their prospects does not mean the industry is back to the good old days. It might even prove a handy exit point.