I have often written about how I believe big oil companies will be a large player when the world is transitioning into green energy. Not all companies have the same strategy though, and in this post I will look into eight different companies and how they transition into green energy. All companies in this post trade on eToro.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
This post will be a bit different than my usual posts. I will not do a deep analysis of a specific company and calculate a buy price, as I have previously done. In case you want to read about a specific company, you can read my latest analyses about Abbvie or Coca-Cola.
For full disclosure you should know that I own shares in Equinor, and that I have previously owned shares in Shell. I will not let this affect the post in any way, as I will try to stay objective. I should also mention that the reason I have chosen these eight companies are that they are featured in the analysis called "The renewable energy strategies of oil majors - From oil to energy?" made by Matthias J. Pickl in 2019 for Energy Strategy Reviews. I do encourage you to read the report, if you find the topic interesting. The eight companies are: BP, Chevron, Eni, Equinor, Exxon, Petrobras, Shell and Total.
If you have read my previous posts, you will probably know that I'm a numbers guy. Hence, I will deliver the historical numbers for all the companies, in order for you to see how they have performed previously. I also like that the numbers are comparable, and it gives a sort of transparency about how the companies have performed against each other. However, the numbers are less important this time, as the future strategy is what matters to me. It means that I will not make a larger analysis of the numbers. I will just provide them for you to see.
The first number we will look into is the return on investment capital, also known as ROIC. It is safe to say that none of the companies have had a fantastic ROIC. Most of the companies have a underwhelming ROIC. However, it is worth noting that six out of eight companies have positive numbers in all of the benchmarks excluding the year of the pandemic, which doesn't really matter. The only company that has a positive ROIC last year is Petrobras.
The next numbers we will look into are the Sales Growth Rates. All of the companies are very underwhelming. All companies are in minus in all benchmarks. Not a single company stands out from the others.
The next numbers are the EPS Growth Rates. Once again the numbers are underwhelming. However, BP, Eni and Equinor all have a benchmarks that is positive, while Petrobras has two.
The Equity Growth Rate is the most important of the growth rates. And it is interesting to see that the two U.S. oil majors and Total are the ones that have performed best, while Petrobras and Eni don't have any benchmarks in positive numbers. Equinor and BP only have one benchmark that is slightly positive.
The final numbers we look into are the Cash Growth Rates. Once again the numbers are underwhelming. The only company that excludes itself from the others is Petrobras, which has been in positive in all of the benchmarks.
Another important thing to look into is debt, and ideally we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. Naturally all of the oil majors have a lot of debt and none of them will be able to pay it off in less than 10 years.
Looking at the historical numbers wasn't really the purpose in this post. I just wanted to share them with you, as the numbers are comparable. I don't think any of the companies really stand out overall despite Petrobras having some positive numbers where others were in negative. What I wanted to proof with these numbers were that if you believe in big oil companies being part of the solution in the transition to green energy, you cannot pick a winner based on the numbers alone. You will need to look at other things that make you choose one company over the others.
It is very difficult to compare strategies one to one, as the companies have different strategies in how they will make renewables part of their business. It isn't like all companies have a common goal but I have tried to look into their strategies and made it somewhat comparable. As I read into the different strategies, I quite easily excluded three companies from the list of companies that I want to invest in.
The first one is Petrobras. The reason for doing so, is this statement from their CEO Roberto Castello Branco: "We do not expect to invest a dollar in renewables over the next five years". Obviously, it easily took Petrobras off the list, as I want to invest in a company that transitions from oil to green energy.
The next company to be excluded was Exxon. I couldn't find any strategic goals in them switching into green energy. Instead I found them to be focused on growing its oil and gas business, and I read that they believe that renewables are unable to offer attractive rates of return compared to hydrocarbons. Hence, Exxon is off my list as well.
The last company that is off the list is Chevron. As with Exxon, I couldn't find any strategic goals for Chevron transitioning into renewables. On their website they write: "We are investing in renewable fuels, products and power to reduce the carbon intensity of our operations and make energy and global supply chains more sustainable". From what I understand they will focus more on decarbonizing their supply chain than switching to renewables. That thesis is backed by their Vice President for energy transition, who said: "Our strategy is not to follow the Europeans. Our strategy is to decarbonize our existing assets in the most cost-effective way and consistently bring in new technology and new forms of energy. But we are not asking our investors to sacrifice return or go forward with three decades of uncertainty on dividends".
That leaves us with the five European companies. All of them have strategies for transitioning into renewable energy. However, as I have mentioned several times, it is hard to compare them one to one, as their strategic goals might be in different time frames, and the sizes of the companies also differ greatly. Shell is the largest of the companies with a market cap of $159,27 billion, followed by Total $122,71 billion, BP $85,56, Equinor $64,05 billion and Eni $42,995 billion. These things need to be taken into account when you look into the companies.
Luckily, most of the companies have a target in 2030. The companies with a strategic target in 2030 are: Total that wants to produce 100 GW in renewable energy in 2030, while BP wants to produce 50 GW and Eni 25 GW. I couldn't find any recent strategic goals from Shell but I found an article from 2017, where they stated that they would produce 20 GW by 2030. Equinor is a bit different, as they want to produce 4-6 GW by 2026 and 12-16 GW by 2035. Meaning the number in 2030, would probably be around 10 GW.
Comparing their goals, it is interesting to see that especially Total, BP and Eni being very ambitious. Obviously, it make all of the companies intriguing from an investing point of view, especially Total as they have a much better historical ROIC and Equity Growth rate than BP and Eni. I feel the ambitions of Shell are a bit underwhelming.
You might wonder why I have invested in Equinor, when their ambitions might seem a bit underwhelming compared to the other companies. So I thought I would elaborate a bit on that decision. The reason I like Equinor a lot is that it is 67 % state-owned (the only other of the eight companies that is partly state-owned is Eni, where the Italian state owns 30,33 %). The reason I find this an advantage for Equinor is that Norway has great environmental ambitions and wants to be climate neutral by 2030. I personally believe that Equinor will play a big part in reaching that goal because of the large state ownership. The large state-ownership also means that I'm less concerned about the debt. Besides that, I was able to get the company at a 50 % discount to intrinsic value.
In case you want to invest in any of the companies, I would advice you to investigate them further. I will not share any of the calculations I have made in this post but it might be something I will share in a future newsletter. I hope this post provided a little insight in how the companies have performed historically, and what their ambitions are in renewables in the future. I expect to do another post in the future, where I dig deeper into the investments that the five companies have made in renewable energy. This is post is only supposed to be the first, and was only meant to scratch the surface, and give you some sort of comparison of the companies.
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