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An old industry joke about Hess, based according to the New York Times in 1972 on the family patriarch’s work ethic, was that the company name stood for holidays, evenings, Saturdays and Sundays.
Sector advisers know the feeling. Two mammoth oil and gas deals, Exxon buying Pioneer for $60bn then Chevron buying Hess for $53bn, have ignited the deals market and set off another round of soul-searching about who is doing what in the net zero transition.
The megadeals appear to be doubling down on a resilient outlook for oil demand — an approach to transition that presumes it isn’t going to happen in a meaningful way. But the combinations make sense in other scenarios too. Big Oil is using its richly-valued shares to buy good assets held by companies with a higher cost of equity. More flexible, domestic barrels in terms of Pioneer’s shale acreage are useful in an uncertain world. So is the ability to operate more efficiently and prune lower-quality assets from portfolios as the outlook changes.
One conclusion has been that the European sector will have to respond to this upscaling of their rivals. It’s not obvious why. Sure, Exxon’s deal will create a production juggernaut 50 per cent bigger than Shell on Rystad Energy’s 2023 numbers and 75 per cent bigger than BP. But there aren’t other growth assets like Hess’s crown jewel in Guyana out there to buy. Nor do Europe’s pumpers have the highly rated stock to engineer acquisitions at toppy prices.
Investor scepticism around the European sector’s decision to invest into the energy transition rather than ignore it won’t be solved by putting two together. Other than the death-throes defeatism of “get bigger and cut costs” (and hey, that may come), it’s not clear what mergers would achieve.
Another oddity is the idea that US companies’ conviction in their oily future should derail European investment in transition businesses. Leave aside the reality of operating in a different market, where social legitimacy requires different choices. It would be downright strange if, faced with the kind of drastic uncertainty about the outlook for oil and gas, everyone opted for identikit strategies.
Forecasts that range from 15 per cent growth in oil demand to 2045 (Opec) to a collapse of 75 per cent by 2050 (one International Energy Agency scenario) should not generate unanimity of response. Nor do the competing forces of continued demand growth, political ructions and energy security concerns versus booming renewables investment, biofuels demand and accelerating electric vehicle adoption produce a slam dunk victor.
Upstream-friendly mutterings by both BP and Shell this year somewhat mask the strategic gulf across the Atlantic. BP is working towards putting 40 per cent of its investment into low carbon areas by 2025, now more weighted to biofuels and EV charging than renewables. Depending on where Shell ends up in its various ranges, its figures are 15-23 per cent, with the US majors barely out of single digits. That spending will be refined — based on returns but also, as with Shell’s job cuts in its light hydrogen mobility division for passenger cars this week, on what technology triumphs in different areas.
These efforts, argues Oswald Clint at Bernstein, are starting to bear fruit in wind projects and carbon capture agreements, which belie the gloom about the likely returns on offer. The European sector has (whisper it) outperformed the US over the past year, with a once-whopping valuation discount narrowing on a forward-price earnings basis. A chunk of what remains reflects a more richly-valued US market generally, even excluding technology.
At the very least, given the sector has outperformed the European market, there should be investors who might like fossil fuel cash flows (and the higher prices likely from low investment) while enjoying the warm glow of financing transition — especially as new business lines (hopefully) become more substantial towards 2030.
The companies’ conviction of two years ago that they have the technical nous, project experience, trading businesses and end-to-end system knowledge to make transition work should still apply. But it is going to be increasingly hard to instil belief on that front while also cosplaying as a Texas oilman. “Sometimes it feels like I’m the one trying to get companies excited about their strategy, rather than the other way around,” said one Europe-based investor.
Changing that impression may still require Hess-like effort — 24/7.