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Is oil a sunset industry? The biggest international oil company seems to think so: (thread) bloomberg.com/opinion/articl…
Shell's investor meetings this week have crystallized a trend that's been going in for a while but not getting that much recognition: The biggest supermajor by revenues is giving up on chasing another leg of oil demand growth:
There's a sort of unofficial rule in the oil industry that you need to have enough proven reserves to keep current output rates going for a decade.
If you don't you're literally running out of oil!
But Shell has been below that level since 2016, and is currently at 8.5 years.
If you don't you're literally running out of oil!
But Shell has been below that level since 2016, and is currently at 8.5 years.
Of the big 7 oil supermajors, we've only seen <10 years three times this century.
1. Shell, since 2016
2. Eni, once, in 2006
3. Shell, in 2004, due to a massive and scandalous reserve writedown prompting executive departures, lawsuits, fines, and a huge capex binge to restock
1. Shell, since 2016
2. Eni, once, in 2006
3. Shell, in 2004, due to a massive and scandalous reserve writedown prompting executive departures, lawsuits, fines, and a huge capex binge to restock
One thing you could imagine Shell saying if it was worried about being caught short in the next oil demand spike is, "We have the best exploration and development teams in the world and we will commit capital to maintain and grow our portfolio of world-class fields".
Here's how Exxon Mobil characterizes its capex plans -- it's all about opportunities and demand growth:
Now here's Shell's Ben van Beurden describing his (on paper, similarly-sized) capex plan: "The focus is on delivery of cash and not maintaining production levels" -- let alone growing them
OK so maybe this is all just rhetoric. Talk is cheap!
But now have a look at where they're committing capital:
But now have a look at where they're committing capital:
The black bars are what they need to spend to sustain current cash flow levels. The blue bars are essentially "new business" or growth. And for conventional oil, deep water, and shale, growth capex is just $1.5bn, compared to a $10.5bn total.
And consider their commitments on returns to shareholders, too. These will be $125bn through 2021-2025, or $25bn a year, next to $30bn-$32bn of capex.
Petroleum is capital-intensive, and that 45-55 ratio looks oddly tilted to shareholders -- 33-66 would be more normal.
Petroleum is capital-intensive, and that 45-55 ratio looks oddly tilted to shareholders -- 33-66 would be more normal.
Along with the ongoing emphasis on cash generation even as the rest of the industry is starting to pick up on capex, that suggests to me that Shell is viewing itself as an income stock as much as a growth stock.
One note on their power spending, too. People have often remarked that $2.5bn (the midpoint of their $2bn-$3bn range) isn't a big number next to the total $30bn capex bill. But I think that underplays it.
It's roughly a quarter of their growth capex. And $2.5bn goes a long way in the power industry, arguably further than it it does in the oil sector. The US and Europe spend about $40bn each on wind and solar generation each year. This would be a significant slice of that.
(Small caveat: it's not 100% clear where Shell will commit their capital in the "power" division but it may not be just wind and solar generation -- something with a power-trading flavour may be more important...
...that said, unless they plan to get into transmission and distribution in a big way, wind and solar would probably be the most *capital-intensive* bit of a non-fossil power business)
(caveat 2: Of course, hopefully US/European wind and solar spending will go up, so $2.5bn would be a declining share of the total. But it's not peanuts!)
Non-financial people might not appreciate what it means if a company is behaving as an income stock rather than a growth stock but the implications are profound.
If you see demand growth for your core product, you want to plough your profits back into capex to capture that.
If you see demand growth for your core product, you want to plough your profits back into capex to capture that.
If you think growth is peaking, you want to start returning cash to shareholders from a stable business.
Apple started paying dividends in 2012, the last year it achieved the sort of revenue growth it had managed in the 2000s.
Apple started paying dividends in 2012, the last year it achieved the sort of revenue growth it had managed in the 2000s.
It seems to me that this is another sign that we're at an inflection point in the global energy industry, a theme I wrote about recently: bloomberg.com/opinion/articl…
Possibly Shell are just wrong! Being wrong is pretty normal in the energy industry, just go back to all the times people thought we were running out of oil.
Certainly, *either* Exxon Mobil *or* Shell is wrong about where the world energy sector is headed.
Certainly, *either* Exxon Mobil *or* Shell is wrong about where the world energy sector is headed.
I'm genuinely on the fence as to which. As someone who's concerned about climate change I hope Shell is right, but the consensus view is still that a fresh leg of demand will kick off sometime soon and bust through any hope that we keep CO2 emissions to safe levels.
Still, it's worth recognizing that this consensus may be broad, but it's not universal. Shell's spending plans are evidence of that. Read the whole piece here (ends): bloomberg.com/opinion/articl…
