Tracking the Energy Transition: Financial Performance Plays Leading Role in Q2 2021 Reports

Are you trying to stay up to date about developments aimed at energy-transition efforts in our industry? This roundup of news recaps some recent announcements.

For the world’s major energy companies, being investable today means excelling in environmental, social, and governance (ESG) criteria that are interrelated and sometimes seemingly at odds with one another in the context of achieving climate goals. As the industry pulls out of one its worst years, chief executive and financial officers emphasized financial gains that fall into the “G” criteria in their Q2 2021 earnings statements and calls, with the “E” criteria occupying less of the spotlight for some of the companies.

The supermajors’ earnings celebration isn’t surprising. Faced with enormous climate challenges, the industry is offering strong returns after years of poor performance and hoping to entice investors who are becoming increasingly wary about the future of fossil fuels in a changing climate. The second consecutive quarter of high earnings was driven in large part by vast improvements in commodity prices, especially crude, which averaged $66.17/bbl in Q2 2021 compared with $28/bbl in Q2 2020 and $61/bbl in Q1 2021. The increasing oil and gas prices helped more than half of the companies in the S&P 500 energy sector surpass revenue expectations. And data from Wood Mackenzie suggest that, regardless of the pace of transition, the world still will rely on oil and gas for much of its energy needs well beyond 2040.

In their Q2 earnings calls, supermajor CEOs and CFOs said they were generating value for their shareholders today by strengthening balance sheets (measured in resilient operating performance, rising profits and operating income, falling debt, increasing dividends, and buybacks) while transitioning their companies for the future by investing in a “disciplined way.”

Several major operators have set goals to reduce carbon emissions and have announced commitments to net-zero strategies. Some have also signaled diversification from core businesses into renewable energy sources.

Yet many analysts warn against short-sightedness on the part of the E&P companies as investors not only look at the usual top- and bottom-line numbers but also focus increasingly on dividend distributions, energy transition, and climate risk. Analysts at Morgan Stanley, who have noted that energy majors’ share prices are becoming increasingly anchored by their dividend distributions, have expressed concern that Big Oil’s dividend expectations remain rather static despite substantial increases to free cash flow forecasts. And there is a significant contingent that thinks long-term investors will conclude that Big Oil is financially risky.

Gordon Gray, managing director and global head of oil and gas equity research at banking giant HSBC, has been quoted as saying that Big Oil stocks will struggle to make progress amid market concerns about their ability to switch swiftly to renewable energy despite improving cash flows.

The energy majors face a delicate balancing act—satisfying not only investors who are skeptical of their willingness to hit net-zero targets by 2050 but also those who do not want to give up the returns they’ve come to expect. Whether these companies decide to invest now to transition away from fossil fuels or defer their decisions remains to be seen.

In the meantime, here is a summary of their performance—financial and environmental—in the second quarter of this year.

BP

• $2.8-billion adjusted net income vs. $2.13 billion from an analysts’ poll (compared with −$6.68 million in Q2 2020).
• Dividend to increase 4% to $5.46/share in Q3 per CEO Bernard Looney.
• Projects lower long-term assumptions for Brent oil price as the pace of energy transition accelerates to a low-carbon economy.

BP retained by far the strongest Q2 reporting on energy transition, in both rhetoric and accomplishments.

Accomplishments.

• Changed “reportable segments” from upstream, downstream, and Rosneft in 2020 to gas and low-carbon energy, oil production and operations, customers and products, and Rosneft.
• Delivered eight major “resilient hydrocarbon projects” since 2020, including four in Q2, in India, Egypt, Angola, and the Gulf of Mexico.
• More than doubled its renewables pipeline to 21 GW.
  
  • Purchased 9-GW solar development in the US.
  • Added 3.7 GW net to the pipeline with entry into UK and US offshore wind markets
  • Submitted a bid for offshore wind acreage in Scotland with EnBW.
  • Confirmed intention to bid for offshore wind acreage in Norway with Statkraft and Aker.
  • Opened the UK’s first fleet-dedicated electric vehicle (EV) rapid charging hub in London, the first of a series intended for cities across Europe; it now has around 11,000 EV charging points in some of the world’s busiest markets.
• Agreed to take full ownership of the Thorntons convenience store business, which is expected to be finalized in Q3, growing BP’s presence in the US fuel and convenience retail business and positioning it to be a leading convenience operator in the Midwest US.
• Took first positions in hydrogen and carbon capture, storage, and use (CCUS), planning industrial-scale green hydrogen in Germany and 1 GW of blue hydrogen at H2 Teesside.

Comments From BP’s Press Release.

• “As the energy transition unfolds, electrification will grow; the energy mix will become more diverse, more integrated, and more local; and customers will demand more bespoke solutions.”
• “We intend to lead the way on building the UK’s first decarbonized industrial cluster.”
• “We plan to leverage transferable engineering skills and capability from development of upstream megaprojects to world-class offshore wind projects working with the same supply chains; to construct CCUS and hydrogen plants using the company’s long-term experience in high-hazard operations; and to transform the retail footprint of the UK from fuel and convenience to charging and convenience.”
• “We have made a convenience offer to Marks & Spencer and have agreement with Uber in London as part of shifting fleets from fuel to charging.”

Defense of Transition Rationale. “While we understand the questions in some investors’ minds, we do see a compelling proposition to deliver competitive returns across these value chains.”

• “Returns in offshore wind can be stable for 15–20 years as we sign contracts for differences (CFD) and power purchase agreements (PPA)—a much more stable prospect than oil price volatility of the past.”
• “Returns in hydrogen and CCUS are yet to be established, but they will need to be higher given the risk and are likely to be stable for the first developments.”
• “Returns in charging and convenience are even stronger.”
• “The magic comes when we use our trading capabilities to optimize between the upstream energy flows and the different customers we interact with—from corporate PPA’s to electric charging points for individuals or fleets, to blue or green hydrogen.”
• “Providing fixed or variable volumes, providing fixed or floating prices, in whatever currency they want with carbon offsets if needed.”

“This is a replica of what we do in our trading business today, which gives us confidence for the future. And this is not unique to the UK. With our deep regional experience, we see the same opportunity to replicate this in other core markets.”

Chevron

• Net income of $3.08 billion.
• Adjusted Q2 profit of $3.3 billion vs −$2.9 billion in Q2 2020.
• Adjusted earnings of $3.3 billion, $1.71/share, vs. an analysts’ survey of $1.60/share.
• Reinstating share buybacks beginning Q3 to between $2 billion and $3 billion per year.
• Dividend increase earlier in the year made Chevron the only Western oil supermajor to raise payout above prepandemic levels.

Energy Transition Accomplishments.

• Committed to lowering the carbon intensity of Permian operations.
• Recently shifted from diesel fuel to electricity and natural gas to power drilling rigs and completion spreads. This reduces emissions, reduces well costs, and takes trucks off the roads, which results in higher returns.
• Eliminated tanks and flare  system from newest generation of production facilities in Colorado to lower carbon intensity to 6 kg of CO₂ per BOE. New facilities also have a 60% smaller footprint, higher reliability, and 15–20% lower lifecycle cost than a traditional facility design.
• Completed front-end engineering on a carbon-capture project for emissions from the gas turbines in a California cogeneration facility. This project leverages two innovative technologies—CO₂ concentration and carbon capture—and has the potential to scale across Chevron’s full fleet of turbines.
• Announced the creation of Chevron New Energies,  a new organization reporting directly to the CEO.

ConocoPhillips

• Adjusted earnings of $1.7 billion, $1.27/share, vs. −$1 billion, −$0.92/share, in Q2 2020 and $1.10/share forecast for this quarter.
• Posted highest profit in nearly 3 years.
• Beat estimates for two straight quarters.
• Lifted its share buyback by two-thirds to $2.5 billion a year in June.

Highlights.

• Has been lowering capital spending and slowing production growth as part of a pledge to reinvest only half of its cash flow in new drilling and return the rest to shareholders.
• Said to be among several suitors for Shell’s Permian Basin assets, worth as much as $10 billion.
• Secured the biggest deal to date in the US shale patch with $13-billion stock purchase of Concho Resources.
• Lowered capital and adjusted operating cost guidance for 2021 and announced plans to increase 2021 share repurchases by $1 billion, bringing total planned return of capital to shareholders to roughly $6 billion for the year.
• No specific energy-transition-related comments or announcements.

Eni

• $2.3 billion earnings before interest and taxes (EBIT).
• $1.1 billion net profit.
• $1.9 billion increase vs Q2 2020.
• $83 million EBIT for Eni gas e luce and Renewables division (vs. $59 million in Q2 2020).
• Will begin $475-million share buyback program over the next 6 months.

Highlights.

• Announced an increase of short- and medium-term targets.
• Enhancing installed capacity target by 1 GW from 2023 to 2025.
  
  • Have defined, expanded, and derisked its pipeline of renewables projects.
  • Renewables pipeline now stands at 9 GW installed and in construction capacity.
  • Additional renewables pipeline of approximately 7 GW related to assets at different stages of maturity.
• Goal of more than 15 GW of stored equity capacity in 2030.

Related News. Eni and BASF signed a strategic agreement on a joint research and development initiative to develop a new technology to convert glycerin to advanced biopropanol, which, the companies say, can be easily added as a drop-in biofuel component to gasoline to reduce greenhouse gas emissions by 65–75%. The approach will apply a high-pressure hydrogenation reaction over a BASF catalyst to ensure that the biopropanol is produced with a high yield and purity while minimizing byproducts. Eni will purchase the glycerin, which is a sidestream of biodiesel production, from European producers.

Equinor

• $4.64 billion adjusted earnings vs. $350 million in Q2 2020.
• $1.58 billion adjusted earnings after tax vs. $650 million in Q2 2020.
• $5.3 billion operating income vs. −$470 million in Q2 2020.
• $1.94 billion net income vs. −$250 million in Q2 2020.

Energy Transition Accomplishments. Equity production of renewable energy for the quarter was 282 GW, down from 304 GW for the same period last year, affected by lower winds than in the same quarter last year.

• Ambition to reach 40% reduction in net carbon intensity by 2035, on the way toward net zero by 2050 and interim ambitions to reduce net carbon intensity by 20% by 2030.
• Expects gross investments in renewables of around $23 billion from 2021 to 2026.
• Expects to increase share of gross investments for renewables and low-carbon solutions from around 4% in 2020 to more than 50% by 2030.
• Based on early low-cost access at scale, Equinor expects to reach an installed capacity of 12–16 GW (Equinor’s share) by 2030.
• Ambition to develop capacity to store 15–30 million tons of CO₂ per year by 2035 and to provide clean hydrogen in 3–5 industrial clusters.
• Baltyk II and III offshore wind projects were awarded contracts for difference for up to 25 years, with potential total capacity of 1,440 MW. At full scale, these will constitute the hub for renewable energy in the Baltic Sea and support Poland’s energy transition.
• Submitted plan for development and operation of Troll West electrification and progressed Hywind Tampen, the world’s first floating windfarm to power offshore oil and gas platforms.

ExxonMobil

• $1.10 earnings per share, its highest in more than 2 years.
• Earnings per share beat 97% average estimated among analysts in a Bloomberg survey.
• Exceeded earnings expectations for third straight quarter.
• Dividend frozen.

Energy Transition Accomplishments.

• ExxonMobil is expected to devote excess cash to debt reduction rather than buying back shares and said it anticipated higher second-half planned spending on key projects, including Guyana, Brazil, and Permian and in chemical, with full-year spending toward the lower end of the guidance range of $16 billion–$19 billion.
• Low Carbon Solutions business advanced multiple carbon capture and storage (CCS) opportunities and low-emission fuels initiatives and established new partnerships.
  
  • Signed memoranda of understanding to participate in a major CCS project in Scotland and to explore the development of CO₂ infrastructure in France.
    
    • The Acorn CCS project in Scotland plans to capture and store approximately 5 million to 6 million metric tons of CO₂ per year by 2030.
    • A collaboration in the Normandy region of France seeks to develop CCS technology to reduce CO₂ emissions by up to 3 million tons per year by 2030.
  • Expects to produce more than 40,000 B/D of biofuels by 2025.
  • Oil-equivalent production in Q2 was 3.6 million B/D.
• Production volumes in the Permian averaged 400,000 BOED.

Shell

• $5.5 billion adjusted earnings vs. $638 million in Q2 2020, $3.2 billion in Q1 2021, and $5.1 billion from analysts’ expectations.
• $0.24/share dividend up by 38% from Q1.
• $2 billion share buyback announced for second half of 2021.

Highlights.

• Building strong customer partnerships across sectors to move to net zero.
• Liquefied natural gas (LNG) supply agreement to fuel BHP’s chartered vessels to reduce emissions to help decarbonize the shipping industry.
• Progress on alliance with Microsoft to provide more than 300 MW of renewable energy, immersion coolant pilots, collaboration on sustainable aviation fuel (SAF), and coinnovation on digital decarbonization platforms.
• Agreement with Daimler to jointly drive adoption of hydrogen-based fuel-cell trucks in Europe.
• Strategic collaboration with Penske to address emissions across customers’ supply chains.
• Collaboration with GM to provide renewable energy solutions to US homeowners, EV owners, and suppliers.
• A memorandum of understanding (MOU) with Rolls Royce to progress use of SAF in aircraft engines and shape policies to support net zero.
• An MOU with Marine Stewardship Council to develop technologies to reduce emissions and accelerate decarbonization of shipping.
• An MOU with T-Mobile US and Deutsche Telekom to supply renewable energy to install more than 10,000 vehicle chargers in Germany.
• Startup of Refhyne, Europe’s largest polymer electrolyte membrane electrolyzer, producing green hydrogen in Germany.
• Joint bid with Scottish Power to develop world’s first large-scale floating offshore windfarms in Scotland.

TotalEnergies

• $4.042 billion adjusted net operating income vs. $821 million in Q2 2020.
• $1.27 adjusted earnings per share vs. $0.02 in Q2 2020 and $1.26 from analysts’ expectations.

Highlights.

• Approximately one-fourth of expected net investments of $12 billion–$13 billion in 2021 to be dedicated to renewables and electricity.
• Gross installed capacity of renewable electricity generation grew to 8.3 GW at the end of Q2 2021.
• Net electricity production increased 73% year on year, notably because of strong growth in renewable electricity generation and the acquisition of four combined-cycle gas turbine power plants in France and Spain in the fourth quarter of 2020.
• Electricity and gas sales, seasonally lower in the second quarter, increased by 35% and 19%, respectively, in Q2 2021 compared with 2020.
• Ranked third globally and first for oil and gas sector in BloombergNEF ranking on the alignment of corporate strategies with the UN’s Sustainable Development Goals.
• Partnership with Novatek to reduce emissions from LNG production, develop large-scale CCS, and study carbon-free hydrogen and ammonia projects.
• Partnership with GHGSat for satellite-based monitoring of methane emissions at sea.
• Contracted with Merck to sell 90 GW/year of renewable electricity in Spain for 10 years.
• Partnership with Amazon to supply 474 MW of renewable electricity to its data centers in Europe and the US and to accelerate TotalEnergies’ digital transformation.
• Contracted with Air Liquide to sell 50 GW/year over 15 years in Belgium.
• Technical collaboration agreements with Siemens Energy and Technip Energies to develop low-carbon LNG technologies.