(Bloomberg) — For most of the past century, Big Oil executives found it pretty easy to explain to investors how their businesses worked. Just locate more of the commodities that everyone needed, extract and process them as cheaply as possible, and watch the profits flow.
That’s all over now. The change has been so profound that the chief executive officer of BP Plc recently found himself hyping the profit potential of another commodity. “People may not know—BP sells coffee. We sold 150 million cups of coffee last year,” Bernard Looney said in an interview in August, referring to beverage kiosks attached to the company’s fuel stations. “This is a very strong business. It’s a growth business.”
Perhaps it was tongue-in-cheek, or a way for the leader of the world’s fifth-largest international oil company to emphasize a relationship with consumers. But it’s clear Looney and other oil bosses are struggling to sell their plans for a future in which the world wants more green energy. Last year, for the first time in history, solar and wind made up most of the world’s new power sources, according to BloombergNEF. If the margins on cappuccinos look good right now, that’s an indication of how hard it will be for Big Oil to rapidly ditch its winning formula of drilling, pumping, and refining while spending its way into renewables.
“This is a time of energy transition,” says Daniel Yergin, the oil historian and vice chairman at consultant IHS Markit Ltd. “The supermajors were born of the trauma of the late 1990s,” he notes, and now “this global trauma of the pandemic will also be a decisive period.”
Legacy energy companies are for the first time sketching out new strategies that in the near future—as soon as 2030, in some cases—would eliminate hydrocarbons. The industry would like everyone to believe it’s turning its back on fossil fuels for the good of the planet. After decades of denying its role in global warming, however, the reality is that Big Oil has been forced to change by green campaigners, local politicians, and pension funds.
The green transition is more evident in Europe, but the same forces are hammering the industry in the U.S. In another unmistakable sign of the times, last month Exxon Mobil Corp. was dropped from the Dow Jones Industrial Average for the first time since 1928. In the S&P 500, the energy sector is now the smallest component. (The mostly state-owned oil giants of the Middle East, India, and China are, for now at least, largely carrying on as before.)
What is the future of Big Oil without oil? At the extreme of this approach are the pathways sketched out by BP and Italian oil group Eni SpA. These companies claim that in the next decade they will come to resemble a cross between a slimmer version of a traditional oil company and what’s today more like a utility (with, yes, a coffee-selling convenience store chain for drivers of electric vehicles). As the legacy business fades, the theory goes, investments in renewable electricity, biofuels, and EV charging points will pay off.
If in the past the biggest names of the industry were known as “international oil companies,” the new jargon describes this approach as creating “integrated energy companies.” Michele Della Vigna, the top oil industry analyst at Goldman Sachs Group Inc., expects to see oil giants attempt the same all-in strategy as before. “We believe the coming decade will see them integrating vertically in gas, already evident, and in power,” he says.
Industry executives insist their legacy business is resilient even as they shift away from oil and natural gas, but their actions suggest otherwise. BP and Royal Dutch Shell Plc have already slashed their dividends—for Shell it was the first time in nearly 80 years. Returning profits to shareholders has long been a pillar of oil’s strength on financial markets. And those like Exxon who are keeping their shareholder payments untouched are taking on far more debt to do so.
The fossil fuel industry as a whole has taken billions of dollars in writedowns, in part linked to the rise of U.S. shale production and the impact of the coronavirus pandemic. If demand peaks earlier than expected, as some in the industry now fear, the most expensive and polluting oil fields such as tar sands in Canada may never be developed. The term of art for these uneconomic oil resources is stranded assets. The consultants at Rystad Energy AS estimate that 10% of the world’s recoverable oil resources—some 125 billion barrels—could become obsolete.
Add it all up, and the Not-So-Big Oil of tomorrow looks greener, smaller, and nimbler—and also less profitable, more indebted, and paying lower dividends. That spells the end of a business model that hasn’t changed much since it was pioneered by John Rockefeller: Integrate oil production with refining, and market it under a single umbrella.
This formula built an industry that made possible 20th century automobile culture, reshaped cities, produced political dynasties, and defined modern life. With hydrocarbons occupying a central role in the global economy, the model became a cash machine and a darling of long-only shareholders who adored its fat and predictable dividends. Oil interests became a powerful political force. The model was durable enough to survive the oil crisis of the 1970s, the rise of OPEC, wars in the Middle East, and the emergence of the ecological movement in the ’80s.
When crude prices plunged in 1998 and the oil giants appeared on the brink, the industry responded in true fashion: doubling down on oil in a series of mergers that created the modern petroleum industry. The five companies that have dominated since then—Exxon, Chevron, Shell, Total, and BP—have been doing roughly the same things their predecessors did decades earlier.
This time is different. The existential crisis of the ’90s taught Big Oil how to do the same but better and cheaper. In the 2020s these companies are trying to figure out how to do something completely different—renewable energy—while quickly reducing or offsetting emissions from the oil and gas they sell.
“All the companies are swimming in the same water of energy transition,” says Yergin, “but they are adopting different strokes to get to the other side.”
The answer from BP is far more radical than from Chevron. But even the smaller steps by American supermajors are remarkable by the standards of a conservative and slow-moving industry. Chevron’s last update to its shareholders in July highlighted an oil project, a deal to buy fuel stations, and investment in solar power. It looks like the end of an era.
Which also means “past profitability is no longer a guide to the future,” says Martijn Rats, who covers the energy industry at Morgan Stanley. The writedowns and diminished dividends demonstrate “that the oil majors have entered a new phase.”
Many are skeptical of the green drive in this new phase. BP promised to move “Beyond Petroleum” in the ’90s, only to return to business as usual once prices rocketed above $100 a barrel in 2008. If crude and natural gas prices rise again, these skeptics say, Big Oil will go back to basics—perhaps even under pressure from shareholders.
The difference this time around is that most top oil executives are adamant there’s no going back. “Our transformation is irreversible,” says Claudio Descalzi, CEO of Eni, the sort of comment that’s widely echoed by his peers. Most senior executives simply don’t believe hydrocarbon prices will ever come back to the above-$100-a-barrel days for any sustained period. And the social, and investor, pressure to tackle climate change is unlikely to abate.
And then there’s oil consumption. In BP’s long-term energy outlook, released on Sept. 14, the company acknowledged that the appetite for refined petroleum has all but peaked. “Demand for oil falls over the next 30 years,” BP wrote in its report. “The scale and pace of this decline is driven by the increasing efficiency and electrification of road transportation.”
That’s why most of the industry—even Chevron—is spending billions of dollars on renewable electricity generation, particularly investments in solar and wind power. BP has pledged to generate 50 gigawatts of renewable electricity by 2030, up from 2.5GW now. Reaching that goal would mark a tremendous shift; it’s more than the renewable output of some large utilities today. But it’s still a drop in BP’s hydrocarbon bucket, even as that bucket shrinks. In 2019, BP’s oil-and-gas production was the equivalent of 2.6 million barrels per day. By 2030, the company has told investors, daily oil and gas output will drop to 1.5 million barrels. Renewables won’t fill the hole left by the missing million barrels.
The question is whether Big Oil can deliver on any of its pledges and make money doing so.
Paul Sankey, a veteran oil analyst, has doubts about the supermajors’ ability to rebuild outside their traditional business. “If they can’t make returns in their core competency, what chance do they stand in a new competition?” he says. The new areas that are supposed to become the heart of Big Oil’s future are, at least today, less profitable than the fossil fuels business. Renewable energy usually delivers a return on capital, a typical measure of profitability, of about 8% to 10%. A conventional oil project yields a return of around 15%. One way to generate higher returns is by taking on more debt, something the companies appear to be open to. The supermajors also face strong competition from incumbents that have already mastered the renewables business, including the likes of Italian utility Enel SpA or its Spanish rival Iberdrola SA.
The strategy shift poses a question to investors: Why pour money into legacy players trying to prove a new concept rather than back a utility that’s already making money in the sector? Take an example: Enel today pays a 4.6% dividend yield—virtually the same as Shell’s 4.3%.
The supermajors have some advantages as they move into greener sources. One is the size of their balance sheet, which allows them to invest more and faster than many of the renewables players. Another is they can learn from the mistakes that others made before them. In theory, the oil giants are also well suited to manage big projects.
And green projects can help legacy giants because renewables are, surprisingly, the steadier sector. “Volatility is lower compared to the oil-and-gas sector, and thus more stable,” says Atul Arya, a consultant who used to work at BP in business strategy.
In the end, that less-profitable stability from solar and wind resources will matter. Because even the oil giants most committed to turning green won’t complete their long goodbye to oil and gas anytime soon. The supermajors will depend on fossil fuels for the next 10 to 20 years, at the very least, to generate enough cash to keep shareholders happy and have some money left to invest in clean-energy projects. And perhaps, as Looney of BP says, in more coffee, too.
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Mitch McConnell ‘refusing to debate his election rival if there is a female moderator’
US Sen. Mitch McConnell and his challenger in the Kentucky Senate race, Amy McGrath, are sparring over upcoming debates.
It all started when Mr McConnell sent a press release from “Team Mitch” accusing his opponent of potentially backing out of a debate in October. But according to subsequent claims from Ms McGrath’s campaign, the real issue is the senator’s refusal to participate in an event with a female moderator.
In a press release issued Monday, Ms McGrath’s campaign alleged that “Amy is ready and willing to debate Mitch, but Mitch is afraid to take the stage unless he dictates every detail.”
The release continues, “Sen. Mitch McConnell has not participated in a debate in Kentucky where the candidates took questions from a female moderator in nearly 25 years, and he continues to resist allowing women to host debates.”
The campaign promised that Ms McGrath would participate in upcoming debates only when “the gender balance of the moderators is restored.”
Record $40 Billion Deal for NTT Sparks Talk of Bigger SoftBank Buyout
(Bloomberg) — The record $40 billion deal for wireless carrier NTT Docomo Inc. is sparking discussion of whether an even bigger Japanese buyout could be in the works: SoftBank Group Corp.
Founder Masayoshi Son has debated for years whether to take his conglomerate private because of a persistent discount between his stock and the perceived value of his assets, particularly Alibaba Group Holding Ltd. shares. The 63-year-old billionaire revived informal talks this year after his shares tumbled and he sold off assets.
The Docomo deal signals Japan has plenty of capital for deals on the kind of scale unthinkable in the past. Nippon Telegraph & Telephone Corp. will borrow the entire purchase price to finance the affiliate’s buyout, even though it had 1.09 trillion ($10.3 billion) in cash and equivalents at the end of March.
“A successful buyout of Docomo could spur a similar move by SoftBank. There is plenty of liquidity for both,” said Justin Tang, head of Asian research at United First Partners in Singapore. “For lenders, this can be a huge source of revenue. And shareholders can have a catalyst in which to realize the value of their holdings.”
Son has been frustrated that investors won’t pay more for his stock considering his company’s holdings. SoftBank posts on its website an estimate that its shareholder value is about 13,000 yen a share, a figure it calculates by adding the value of stakes in Alibaba, SoftBank Corp. and other assets, then subtracting debt. That’s roughly half the roughly 6,500 yen a share SoftBank Group trades at.
After his shares plummeted in March, Son announced a record 4.5 trillion yen asset sale plan and a record 2.5 trillion yen buyback program. In addition, he’s cut a deal to sell chip designer Arm Ltd. to Nvidia Corp. for about $40 billion in cash and stock, although regulatory approval is expected to take more than a year.
“Given SoftBank’s valuation discount and the availability of cheap financing, there is a good chance of an MBO,” said Tang.
Goldman Sachs Group Inc. analysts published a research note after the Docomo buyout, arguing the deal is likely to spark further corporate alignments in the country. The report didn’t specifically mention SoftBank.
The Docomo deal does present at least two challenges for SoftBank. NTT is buying out public shareholders in part so it can lower wireless rates more easily, a competitive threat that may hurt SoftBank Corp., Son’s domestic telecom unit. Newly anointed Prime Minister Yoshihide Suga has made lower phone tariffs a key part of his early agenda.
In addition, NTT is paying 40% more than Docomo’s share price before the announcement. SoftBank shareholders could ask for a similar premium if Son pursues a buyout, according to Bloomberg Intelligence analyst Anthea Lai.
SoftBank Group’s market capitalization is about $128 billion, so that kind of premium would mean valuing the company at $179 billion. That would be by far the largest buyout ever.
Between the stake held by Son himself and the treasury shares SoftBank has already bought back, more than 30% of the company’s stock is already controlled by management, according to Bloomberg-compiled data.
SMBC Nikko Securities Inc. analyst Satoru Kikuchi wrote earlier this month that a management-led deal to take the company private looked feasible.
“The firm seems to be selling off assets rapidly and is considering the sale of its ARM holdings earlier than initially planned,” Kikuchi said in a research note. “Given the scale of its buyback operations, we think delisting via management buyout is a possibility.”
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Governor endorsements adds more fuel to Georgia Senate race
A pair of new high-profile endorsements are adding fuel to an already contentious special election for a U.S. Senate seat in Georgia.
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