* European majors' move to clean energy weakened by high
debt
* Will have to make acquisitions in green transition
* GRAPHIC-Big Oil's soaring debt: https://tmsnrt.rs/2EDyeXW
* GRAPHIC-Big Oil's writedowns: https://tmsnrt.rs/2Ewvwnd
(Adds comment, paragraphs 15-16)
By Ron Bousso
LONDON, Sept 1 (Reuters) - As major oil companies prepare to
spend billions on renewable energy assets to stay relevant in a
low-carbon future, the industry's patchy track record on
takeovers is a red flag for some investors.
Ten years ago, the world's top energy companies were
spending billions of dollars on major oil and gas assets and
costly drilling programmes in remote parts of the world in a
relentless drive to produce more.
Fast forward through an oil price crash in 2014 followed by
the fallout from the coronavirus pandemic this year and some big
oil companies are counting the cost of the spending spree - as
are their shareholders.
When Shell bought BG Group for $54 billion in 2016
in the midst of the price crash, Chief Executive Ben van Beurden
made a compelling case to investors: The deal would support
Shell's dividend under almost any imaginable oil price scenario.
Four years later, with the world gripped by an unexpected
global pandemic, the Anglo-Dutch company has slashed its
dividend for the first time since the Second World War and
suspended what was the world's biggest share buyback programme.
For investors, the deal crowned a decade of disappointing
takeovers, from Exxon Mobil's $30 billion acquisition of
North American natural gas producer XTO in 2009 to Repsol's
$8.3 billion takeover of Canada's Talisman Energy just
months before the 2014 crash to Occidental Petroleum's
ill-timed $38 billion bet on shale producer Anadarko last year.
Now, with European policymakers cracking down on greenhouse
gas emissions, the region's major oil companies have promised to
reinvent themselves as low-carbon power suppliers that would
thrive in a world of clean energy.
To hit their goals in time, though, they will almost
inevitably have to chase a relatively small pool of renewable
energy assets in competition with big utility companies at a
time valuations are going through the roof.
And some investors worry that history will repeat itself.
"The majors have been poor capital allocators for the better
part of the past 20 years," said Chris Duncan, an analyst at
Brandes Investment Partners which has shares in several European
oil firms. "I'm nervous ... usually when companies transition to
a different market the transition is not a profitable process."
BP and Total will present details about
their new strategies to investors this month. Repsol will hold
its strategy day in November and Shell's will be in February.
'THE SAME MISTAKES'
The collapse in oil prices since COVID-19 struck has also
forced the big companies to wipe billions of dollars off the
value of their assets and it has also hit revenue to the point
they've taken on more debt to keep up payments to shareholders.
Shell, for example, cut $16.8 billion off the value of its
assets, which included a big chunk of the flagship QCLNG
liquefied natural gas (LNG) plant in Australia it acquired
through the BG deal.
All told, the world's top energy companies have booked asset
writedowns totalling $60 billion this year following the slide
in oil prices and demand during the coronavirus pandemic.
Energy companies listed in the S&P 500 index accounted for
60% of $329 billion in write-offs over the past decade,
according to Evercore ISI analyst Doug Terreson.
"CEOs overestimated capital allocation skills and
underestimated competitive threats," Terreson said.
And since 2005, the combined debt of the top five global oil
majors, which include Shell, BP and Total, has risen five fold
to $370 billion. That means much of the cash they will generate
in the coming years will probably go towards cutting debt.
So as oil companies chase renewable assets such as wind,
solar and hydro, which generally have lower returns than oil and
gas - or invest in green projects from scratch - they'll be
starting from an already highly leveraged position.
Some analysts said that with record debts, an uncertain
outlook for oil prices and a weak deal-making record, the big
oil companies face a tough task getting investors on board.
"The European majors in particular will have to earn the
right to invest more in renewables, and convince investors they
will not make the same mistakes again, and again," said RBC
Capital Markets analyst Biraj Borkhataria.
"When Shell acquired BG Group, a key quote from Shell's CEO
stuck with us: 'Bold, strategic moves shape our industry'.
Unfortunately, many of the 'bold' moves from management teams in
recent years have proven to destroy value over the long term for
shareholders," he said.
Speaking in July, Shell's CEO stood by the deal.
"The company did get stronger, but indeed the company was
not able to withstand the onslaught of COVID if we wanted to
adopt a prudent stance ... I remain convinced it was the right
move," van Beurden told reporters.
Three current and former BG and Shell executives interviewed
by Reuters, however, believe the deal was overvalued even at the
time due to bullish oil and gas price forecasts.
LOWER RETURNS
Big oil companies have historically attracted investors with
a promise of large and steady dividends. But the sector has had
a poor track record from shareholders' perspective of late.
Over the past five years, Shell's total shareholder returns
stood at minus 2.9%, according to Refinitiv data.
The picture is similar for others including BP, Exxon Mobil
and Total. In addition to Shell, BP and Norway's Equinor
, have also cut dividends and suspended share buybacks.
BP's total shareholder return, which assumes dividends are
reinvested in its shares, is just 1.4% since 2015, while for
Exxon it was minus 7.3%, the weakest in the sector, according to
Refinitiv data.
Chevron had the strongest total returns at 5.9%.
By comparison, returns from Apple shares over the
past five years are above 40% while Google's Alphabet
shares have returned more than 15%.
The steady drop in the value of oil companies - BP's market
capitalisation has halved over the past two years to about $75
billion, for example – might also make it harder for them to
land large acquisitions of renewable assets or power companies
which have seen they shares surge in recent years.
Shares in Danish renewables power firm Orsted,
for example, have more than doubled over the past two years,
giving it a market capitalisation of about $45 billion.
Shares in Spanish utility Iberdrola, one of the
world's biggest renewable power companies have jumped 180% in
two years to give it a market value above $80 billion.
Valuations of companies such as Orsted could also rise
further as many of Europe's top oil and gas companies compete
amongst themselves to expand their low-carbon businesses fast.
Still, some investors said that as the European oil
companies evolve into becoming low-carbon businesses, they might
attract a different kind of investor more interested in
long-term stability than bumper shareholder payouts year after
year.
"Traditional oil and gas investors are fond of the high
returns and, until recently, the outsized dividends associated
with the sector." said Alasdair McKinnon, portfolio manager at
The Scottish Investment Trust.
"However, this shift may attract a different set of
investors who look at the prospectively lower returns on offer
from renewables with a less jaundiced eye."
(Reporting by Ron Bousso; editing by David Clarke)
