Pumped -- Part 20 -- July 28, 2023

From Laura Hurst, Bloomberg News, Blooomberg Daily 

Europe’s biggest oil companies made it clear this week they’ll go the distance to close the valuation gap with their US peers.

Declining commodity prices have slashed their profits from the dizzying records of 2022, but the companies aren’t allowing that to be a distraction. Shell Plc, TotalEnergies SE, Equinor ASA and Repsol SA are pledging to keep the shareholder payouts high.

Shell alone has so far committed to repurchasing at least $12.5 billion of stock this year. That compares with Chevron Corp.’s own buyback range of $10 billion to $20 billion.

While earnings have declined in the latest quarter, they still remain relatively high for the Europeans. That gives them some room to keep shareholders happy.

In the depths of the pandemic, Shell, BP Plc, Equinor and Italy’s Eni SpA all cut their dividends substantially. And the markets punished them for it.That stands in contrast with Chevron and Exxon Mobil Corp., which stuck to their payouts throughout.

A key pillar for Shell in regaining that lost ground is pivoting the company back toward its traditional oil and gas business. Just last month, Chief Executive Officer Wael Sawan laid out his plans to investors in the New York Stock Exchange: reduce expenditures but devote a greater share of spending to fossil fuels.

He also used the stage to announce a 15% increase in the dividend. Then, he followed through Thursday by saying that share repurchases in the second half of the year will be, at the minimum, slightly higher than the previous guidance of $5 billion.

Sawan has also promised “ruthlessness” on spending and investing in new projects, particularly in offshore wind, where inflationary pressures have already started to kill off developments.

By reining in the low-carbon business, he’s risking the wrath of environmentalists. Already, a top UK fund manager questioned the strategy, and the Church of England Pensions Board dumped the company’s shares.

The market, too, has been cool so far. The gap between the price-to-earnings ratios of Exxon and Chevron has widened in comparison with Shell and BP.

It highlights the scale of the challenge facing Sawan and his counterparts in Europe’s oil majors. While tight spending, a refocusing of priorities and healthy returns certainly won’t hurt, closing that valuation gap with the US may be a massively difficult undertaking.