Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The Iran war has been good for European oil majors. Rising prices have left companies such as BP and Shell with a new influx of cash. But not all have the freedom to choose what they do with it.
Consider BP. In volatile and snarled-up energy markets, the group’s traders are making money hand over fist. The company on Tuesday reported a 43 per cent improvement in overall adjusted profit before tax compared to the immediately preceding quarter, thanks to the segment that houses its trading business. Higher oil and gas prices are not showing up in financial results, but they will. Analysts polled by Bloomberg expect BP’s ebitda this year to rise by 40 per cent, and Shell’s by a quarter.
A wise European oil major might use this windfall to rebuild its growth prospects. Just a few weeks ago, the region’s oil and gas groups seemed stuck between a rock and a hard place. Having slowed their hunt for new oilfields, they were running out of resources to drill: globally, oil and gas reserves, expressed as a multiple of the current year’s production, have dropped by a quarter since 2013, according to Goldman Sachs.
The extra funds from higher oil prices mean they can now in theory increase exploration without cutting shareholder returns. And the rise in their share prices gives companies such as Shell more scope to buy rivals — and their oilfields — using their own stock. This is also, of course, a happy prospect for oil-service companies that provide the drills and vessels.
Take Shell’s $16.4bn cash-and-shares swoop on Canada’s Arc, for instance. This is clearly a strategic deal for the UK major: adjacent shale patches mean the companies can save on drilling. And Shell, which owns infrastructure to liquefy gas and ship it abroad where it can be sold at much higher prices, can get more profit out of this than Arc could alone.
But there is a dash of opportunism here too: the share of Arc’s gas production which is landlocked made it less sensitive to global commodity prices, so it has recently far underperformed Shell itself. Granted, it may be hard for rivals to replicate this playbook exactly: ordinarily, the share prices of leveraged laggards tend to outperform when the market turns, which makes opportunistic acquisitions more difficult to pull off in good times than in bad. But it is still worth a careful scour of the globe.
Not everyone has the luxury of splashing cash about, or training their sights on portfolio-burnishing acquisitions. For highly leveraged companies such as BP, the priority should be to pay down debt. Indeed, the group has announced that, on top of shrinking its debt pile from the current $25bn to between $14bn and $18bn by 2027, it will also retire $4.3bn of expensive hybrid bonds.
BP’s investors may welcome the focus: its shares have led European rivals’ since the start of the year. But over the long term, those best served by this crisis will be those that can use the resulting cash flows not to repair, but to build anew.
[email protected]
