Will COVID-19 crisis accelerate the transition of oil and gas companies in the clean energy sphere?

The end of Q1-2020 quarterly results represents a good moment to reflect on impact of COVID19 on company’ strategies and see if any new trend is emerging, especially for the oil and gas sector which has been particularly impacted by the pandemic.

A quite notable share of Majors have raised even before the crisis their own ambition of transforming their business in a more sustainable way, reducing impact of their operations and expanding activities towards renewables and other clean energy technologies. While such intentions provided an encouraging sign, the actual level of investment in non oil and gas core business was actually very marginal and averaging about 1% of overall annual capital investment, as found out earlier this year by the IEA Report “Oil and Gas Industry in Energy Transitions”.

The earnings season just completed offered the very first concrete opportunity to verify the real commitments of the oil and gas industry to diversify outside its core business. Or – in other terms – to check if the changed conditions and reduced financial availabilities would have been already a reasons for those companies to modify the ‘pace of change’. In this sense, so far the number of confirmations and surprises have been on positive side.

BP confirmed its commitment to be carbon neutral by 2050, joined by Shell in mid-April, while Total set the same target for its European operations in early May. Also most of Majors confirmed and expanded further their targets outside oil and gas sector. Eni increased its target of renewables capacity installed to 55GW by 2050, Repsol and Total kept their investment in new solar plants (and beyond), while Shell declared its intention of increasing its portfolio of products at lower carbon intensity, such as renewable power, biofuels and hydrogen.

Another very interesting element concerns on how the large oil and gas corporations have reacted to the dramatically-changed market conditions. And also here there are some interesting similarities and differences among companies. One common feature across the entire industry is the obvious and forced solution to reduce drastically capital investment plans and looking for contracting operating expenditures while enhancing efficiency and cost saving measures. With oil demand experiencing an unprecedented crash and many uncertainties on future demand trajectory, those companies had no other choices. Also share buybacks programme were postponed or cancelled.

There are also some important differences in company strategic choices: most of Majors confirmed their dividends policy, despite the collapse of revenues and the steep plunge in their stock evaluation that makes current dividends delivering a stratospheric yield. However, for the first time, cuts in dividends were announced by some big companies, notably Shell – the first time since World War II - and Equinor. What this might mean for the solid relationship between Majors and large institutionally , traditionally cemented by stable dividends is a quite open question for the future.  

Actually, the profitability of oil and gas companies was questioned even before the current crisis as energy recorded the worst sectorial performance of the last decade of the entire Wall Street. This topic was also analysed in the last year’s edition of IEA’s World Energy Investment report finding that the total return of oil and gas companies had suffered in recent times compared to other energy sectors.

The big companies have entered in this new crisis much better equipped than they were before 2014-2016 oil prices collapse. A lot of ‘fat’ was trimmed and their financial and operation efficiency significantly increased.

However, the current downturn poses to companies a level of challenges probably never seen before. This crisis comes in a moment where, even for those more climate oriented, the financial revenues generated by traditional oil and gas activities were supposed to serve also for the transformation of companies from ‘oil and gas giants’ into ‘energy’ corporations. Dividends were the assurance to keep investors engaged and supportive of this journey in a potential virtuous circle.

The pandemic and its consequences appears to put under question this approach and represents a major threat to such architecture. How those companies will be able to have access to capitals and keep the confidence of investors will be crucial to their own future.