FTSE 350 Review: Oil and gas set for another peak year

The majors and the rest

But despite the surge in prices raining cash on all oil and gas producers, there is a clear split between the top UK-listed companies, Shell (SHEL) and BP (BP.), and the rest. This pair has hammered home their status as critical parts of the modern world at a time when the consensus was for a decade of downsizing and lower-return green investment. This has not panned out, and – as we noted last year – new Shell boss Wael Sawan has been saying for some time, prior to taking the top job and prior to the war in Ukraine, that he favours expansion in areas such as liquefied natural gas (LNG).

On top of that focus on growth, some 2020-era emissions goals could be on the way out: “We believe Shell should pivot to a more balanced approach [on emissions] given its prior strategic guidance was put forward at a time where energy security was of little concern, and de-carbonisation was front and centre,” say analysts at RBC Capital Markets.

This shift could come by adopting less aggressive green targets – for instance by emphasising that LNG power plants’ “avoided emissions” stand them in good stead relative to coal power plants. But just as the ‘end of oil’ rhetoric was undermined by the reality of the global energy system, a new marketing-over-Mother-Earth approach could also prove painful for investors in the long run as the worm turns again. 

In other areas, there is slightly less debate about what to do with bountiful cash flows. Harbour Energy (HBR), the top North Sea producer, saw its cash flow triple between 2021 and 2022, and its previously high levels of net debt have come down. But management has stopped exploration spending in the North Sea – its key base of operations – in protest at the government’s windfall profits tax. 

Its 2022 capital expenditure of $1bn (£810mn) was $300mn below previous guidance, “due to the decisions not to proceed with several North Sea exploration and appraisal wells” (as well as the delayed arrival of some rigs and foreign exchange rates). Peel Hunt says there will be a similar capex level in 2023. “Notwithstanding a year of solid operational and excellent financial performance, the introduction and subsequent increase to the [energy profits levy] has significantly reduced Harbour’s ability to take investment decisions on new projects to deliver growth,” says analyst Werner Riding. 

Diving down to the mid-cap level, conditions are murkier. This is where the sudden influx of cash has encouraged boards to think strategically – not always with great success. Tullow Oil (TLW) was onto a winner when it convinced Capricorn Energy (CNE) to agree to a merger, given it would have meant the end to Tullow’s debt woes. Capricorn shareholders revolted, in the first of two major deals they have rejected in the past year. A new board will now determine Capricorn’s course, while Tullow has moved on by funnelling its higher cash flow into debt reduction – its net debt to Ebitda ratio for 2022 was 1.3 times, compared with 2.2 times a year ago. 

It is only chipping away at this pile, however, bringing net debt down from $2.1bn at the end of 2021 to $1.9bn a year later. But it’s worth remembering this was a £3bn market cap company in 2019. That share price level is unlikely to be hit again, but there could be room for improvement.