From Fidelity27 Apr 2022 04:43
WITH gas prices soaring and the oil giants in a dash to offload Russian energy investments, BP and Shell find themselves at the eye of the storm yet again. Only this one won’t put the wind up investors in the same way as the fossil fuels debate.
So far this particular storm has been good for the oil giants’ businesses. The surge in global gas markets during the final months of 2021, coupled with an oil price rally to seven-year highs, has seen them rake in bumper revenues.
BP reported a massive upswing in full-year net profit, its highest in eight years, helped in large part by soaring commodity prices. It reported underlying replacement cost profit, used as a proxy for net profit, of $12.8 billion for 2021. That compared with a net loss of $5.7 billion the previous year.
And there’s been good news for shareholders. Historic profits have put BP shareholders in line for a $1.5 billion share buyback in the first quarter of this year. BP has also maintained its dividend at 5.46 cents per share.
Shell too has reported bumper annual earnings after what chief executive Ben van Beurden described as a “momentous” year. Record prices saw Shell’s integrated gas division generate 63% of the UK-based group’s $6.4 billion earnings in the fourth quarter of 2021.
Shell is “stepping up” its distributions to shareholders, with plans to buy back $8.5 billion in shares in the first half of the year and increase its dividend by 4% to $0.25 per share in the first quarter.
But where there’s oil and profits, there is always controversy and the calls for a windfall tax are growing louder. But memories are short when profits are being made amid a cost-of-living crisis, and the oil giants haven’t always been on a roll. In recent years, both Shell and BP have cut their dividends, tens of thousands of jobs have been culled and their share prices have seen new lows.
The current storm may also be overshadowing, but won’t put paid to, the fossil fuels issue, as both companies well know. They have already put time and a lot of money into revamping their longer-term strategic plans. The great global energy transition - electric vehicle charging, renewable energy and biofuels, etc - needs to happen this decade. And BP and Shell know that.
When it comes to offsetting Russian oil supply, Shell, as the biggest of the seven western supermajor gas producers last year, appears best placed. According to energy consultancy Wood Mackenzie Shell extracted 103 billion cubic metres from gas projects around the world, 44 billion of which was converted to LNG; a core of Shell’s strategy. But more is needed and with any investment in new production likely to take a minimum of 15 years to pay off, the new challenge is to find a way to make it payback - and quickly.
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