By John D. Stoll
You're forgiven if Saudi Aramco's plans for a December IPO make
you wonder whether the anxiety over Big Oil's demise is premature.
Aramco earns more than Amazon.com Inc., Apple Inc. and Microsoft
Corp. combined; its market value is expected in the $1.5 trillion
to $2 trillion range.
But not everyone can throw off cash like a Saudi Aramco, which
can get oil out of the ground more cheaply than just about any big
oil company. Most of the world's big oil companies face real
challenges trying to convince investors that oil isn't in danger of
becoming the next coal, even if such concerns may be wildly
premature.
Oil majors like ExxonMobil Corp. represent a shrinking share of
the S&P 500's value. Naysayers look at electric cars and
anti-carbon legislation and predict oil's best days are behind
it.
Many oil executives say they've heard their critics, and one way
to respond is to fund a greener world.
Royal Dutch Shell PLC and Total SA have each committed as much
as $2 billion annually to renewable technologies. BP PLC on
Wednesday said it is investing 10 million euro in Whim, a Finnish
transportation app designed to reduce private car ownership.
And clean energy was an underlying theme at CERAWeek, the annual
IHS energy conference held earlier this year in Houston. Electric
cars and the Green New Deal were as prominent as oil rigs and shale
wells.
All this talk doesn't mean oil companies are poised to
underwrite a carbon-free future. History and research suggest big
business is built for a different kind of green. Sustainability
ambitions will go unfulfilled until wind turbines and solar fields
deliver the level of profit oil assets do.
Oil companies aren't wagering much on that happening anytime
soon.
A report by CDP, a U.K. nonprofit working with companies on
environmental-impact disclosure, found the world's top 24 publicly
listed oil-and-gas companies spent 1.3% of $260 billion in total
capital expenditures on low-carbon solutions last year. Energy
consultant Wood Mackenzie estimates spending on
clean-energy-related mergers and acquisitions was a measly $6
billion over the past four years.
Mark Mills, a partner with Cottonwood Venture Partners, said oil
executives "have to genuflect in the direction of what's going on
in climate-change circles." Governments are pressing us to reduce
our carbon footprint; investor appetite for all-things-sustainable
is growing; no one wants to be labeled a climate-change denier. But
executives realize they've got more immediate headaches.
Mr. Mills, also a research fellow with the Manhattan Institute,
a conservative think tank, said executives "got way over their
skis" on costs when oil prices were high. Now, with those prices
consistently low, these companies struggle to persuade Wall Street
they can continue to deliver for investors accustomed to cashing in
via dividends and buybacks.
Profits fell 31% at large oil companies in the most recent
quarter. In late October, Shell executives were interrogated by
analysts after reducing a $25 billion share buyback commitment for
2020, and BP shares were hammered after executives said a dividend
increase may not be in the cards.
Money problems are only part of the equation. Mr. Mills said the
"epic-low valuations of these companies is being partially driven
by the fact they are on the wrong side of the climate
discussion."
Some think Big Oil is like the buggy industry in 1900, or
flip-phone makers at the dawn of Apple's iPhone. The question for
oil executives looking at those transformations is, "will you
matter when there is a windmill on every corner and a solar panel
on every roof?"
This is a simplistic way of thinking about a complex energy
puzzle. No one really knows, for instance, when global demand for
oil will begin to decline. Even with all the talk of a greener
future, the world's thirst for oil grows every year. Some think
that point of peak oil demand could come in the next 20 years.
Others say it could be much longer.
"People don't just reboot," Chevron Corp. Chief Executive
Officer Mike Wirth said during an interview at CERAWeek. Big
changes, he said, often require big capital outlays that are
planned years in advance. A manufacturer like Whirlpool Corp. may
want to shift more facilities to wind power, or a ship operator
like A.P. Moller Maersk A/S may want to transition to zero-emission
vessels. But those commitments require big dollars and long
timetables to achieve.
Mega corporations won't be the ones to deliver all the answers.
As Stanford Graduate School of Business lecturer Maxwell Wessel
said, "big companies are really bad at innovation because they're
designed to be bad at innovation."
Mr. Wessel is also chief innovation officer at German software
giant SAP SE and an evangelist of the " Industrialist's Dilemma."
The theory holds that the very things that helped make the
industrial era's most-profitable businesses are thwarting them as
software remakes the world. He says job No.1 for established
companies is achieving operational efficiency, not reinvention.
Remember BP's "Beyond Petroleum" effort? It came with billions
of dollars of investments in renewables. When executives scrapped
the effort earlier this decade, it choked off those initiatives.
BP's 2011 exit from a 40-year attempt at building a solar business
came with the admission "we tried and struggled to make money."
Shell is currently chasing the reinvention dream -- but it will
be costly. It aims to be No.1 in electric power by the early 2030s.
That business could potentially deliver equity returns of between
8% and 12% -- handsome, but lower than the 12% to 15% target for
traditional oil-and-gas businesses.
Mr. Wirth, the Chevron CEO, said the conversation about Big
Oil's place in addressing climate change is too polarized and
one-dimensional. "This idea of an energy transition is not a new
idea. People will talk about this as if it just came up."
He said Chevron itself has demonstrated its ability to pivot in
the past.
"Our company's been around for 140 years," he said. "When our
company started we were not producing petroleum to fill vehicles
because Henry Ford had not invented the car yet, and the Wright
Brothers were decades away from their first flight. So we began
producing kerosene to replace whale oil for light."
Mr. Wirth says new forms of energy have since "come on top" of
older sources, not in place of them. Under this logic the future
will have far more sources of energy, not fewer.
Anyone thinking Mr. Wirth is out of step should take a look at
the revealing interview Ben van Beurden did with Reuters a few
weeks back. The Shell CEO warned against demonizing oil and gas and
"unjustified" worries about the business model.
"It's entirely legitimate to invest in oil and gas because the
world demands it," Mr. van Beurden said.
As true as that is, it's important to remember that some were
saying the same thing about buggy whips until the Model T came
along.
(END) Dow Jones Newswires
November 08, 2019 11:14 ET (16:14 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
Exxon Mobil (NYSE:XOM)
Historical Stock Chart
From Apr 2024 to May 2024
Exxon Mobil (NYSE:XOM)
Historical Stock Chart
From May 2023 to May 2024