BP Plc Cuts Dividend and Goes All in on Renewables, Is this a Trend?

Supermajor oil is a term used to describe the largest oil companies in the world. The supermajors are considered to be BP, Chevron, ENI, ExxonMobil, Royal Dutch Shell, Total, and ConocoPhillips. Supermajors were formed between 1998 and 2002 through a series of mergers. Exxon combined with Mobil. Chevron took over Texaco. Conoco Inc. merged with Phillips Petroleum. BP acquired Amoco and ARCO while Total combined with Petrofina and Elf Aquitaine. The supermajors are global energy companies with assets all over the world. They are large enough to be able to make major investments in new oil fields. They are involved in both upstream and downstream operations. Most pay large dividends. At one point, the supermajors were among the largest stocks by market capitalization. With the decline in oil prices and the rise of technology stocks, that is no longer true. 

On August 4, 2020, BP announced that it would cut its dividend 50%, cut oil and gas production by 40%, and boost renewable energy investments to $5 billion annually in order to become carbon neutral. BP becomes the third supermajor to pledge to the cut emissions to net-zero following Shell and Total. BP’s dividend cut follows a similar cut by Shell in April. A smaller energy company, Equinor, also cut its dividend in April. The dividend cuts are perhaps a reflection of decreased cash flow in a new, low oil price, environment. However, it can also be viewed as a recognition that the world’s energy landscape is changing. Technology improvements have lowered the cost of oil production, meaning oil prices may remain at current low levels. The rise of electric vehicles has the potential to take away oil demand. Also, the economic downturn associated with the COVID-19 pandemic has decreased the world’s demand for oil.

So, what does this mean for the supermajors going forward? Will other oil companies follow BP’s lead? Chevron has taken a different route. On July 19, 2020, the company announced the $13 billion (including the assumption of debt) acquisition of Noble Energy. The acquisition greatly increased its position in the Permian Basin and other oil-rich areas. Does the acquisition represent the management’s commitment to oil, or is it simply an attractive acquisition at a good price? Companies can be very profitable, picking up market share, even in industries that are in decline. Investors should pay close attention to Chevron management’s actions going forward to get a better understanding of its corporate strategy.

It is a bit early to declare an end to the era of supermajor oil companies. At the same time, the supermajors and investors in supermajors must recognize changing industry dynamics. Oil demand is slowing while renewable demand is growing. In a broader sense, perhaps it is best not to think in terms of oil demand versus renewable demand. The demand for energy continues to grow, and energy companies must be nimble to adjust to changes in the types of demand. To do so, energy companies may want to have a hand in all types of energy. Perhaps, this really is the end of the supermajor oil companies. But if that is true, it will only mean the birth of supermajor energy companies.

Suggested Reading:

Is M&A Picking up in Energy Sector

Exploration and Production Second Quarter Review and Outlook

Is $40 the Sweet Spot for Sweet Crude?

Each event in our popular Virtual Road Shows Series has maximum capacity of 100 investors online. To take part, listen to and perhaps get your questions answered, see which virtual investor meeting intrigues you here.

Sources:

https://finance.yahoo.com/news/bp-walks-away-oil-supermajor-080220211.html, Will Kennedy, Laura Hurst and Kevin Crowley, Bloomberg, August 5, 2020

https://www.washingtonpost.com/climate-environment/2020/08/04/bp-built-its-business-oil-gas-now-climate-change-is-taking-it-apart/, Steven Mufson, The Washington Post, August 4, 2020

http://priceofoil.org/2020/05/01/from-supermajors-to-superminors-the-fall-of-big-oil/, Andy Rowell, OilChange, May 1, 2020

https://www.worldoil.com/news/2020/5/12/supermajors-all-have-ambitious-and-widely-varying-net-zero-goals, Akshat Rathi, World Oil, May 12, 2020