- BP spending shift suggests hydrocarbons could be with us for longer than many hope
- Global oil majors’ aggregate capital investment and capex/sales ratios are nudging higher, but the latter is still low by historic standards
- Shares in European oil equipment firms and their sub-suppliers rise in response
“While the profits, dividend, buybacks and debt reductions will grab a lot of the headlines, perhaps the most interesting number in BP’s full-year results statement is capital expenditure, because the firm is nudging up its spending plans on both renewables and oil and gas,” says AJ Bell investment director Russ Mould. “The increase in drilling and exploration work may be an acknowledgement that fossil fuels could be with us for longer than we would like or hope and also explain why oil equipment and services stocks are outperforming oil producers. Perhaps they are the biggest winners of all out of BP’s statement, even more than HMRC.
“Hunting shares are not moving much today but they are up by more than 40% over the past 12 months, while on the European bourses Technip, Saipem and Subsea7 are all up, and some of the biggest gainers are the makers of steel tubes for the oil industry, Vallourec of France and Tenaris of Italy.
“All of these firms will doubtless welcome the prospect of higher spending by oil producers and explorers after several fallow years. BP is now looking to run its annual investment budget at around $16 billion, using the mid-point of the guidance provided by chief executive Bernard Looney alongside the full-year results, compared to $12.1 billion in 2021 and $11 billion in the COVID-hit year of 2020.
Source: Company accounts, Marketscreener, consensus analysts' forecasts for BP, Chevron, ConocoPhillips, ENI, ExxonMobil, Shell and TotalEnergies
“The aggregate capital expenditure of the world’s oil majors – BP and Shell of the UK, ExxonMobil, Chevron and ConocoPhillips of the USA and Europe’s TotalEnergies and ENI – is expected to rise 12% in 2023 and reach $110 billion, up from the 2021 low of $74 billion.
“However, that is still only 7% of sales, barely half the peak capex/sales ratio of the middle of the last decade when oil prices were humming and it now remains to be seen whether this is a turning point.
|
|
Capital investment as a percentage of sales |
||||||
|
|
2018 |
2019 |
2020 |
2021 |
2022 |
2023E |
2024E |
|
BP |
5.6% |
5.5% |
6.8% |
7.0% |
5.0% |
8.1% |
8.3% |
|
Shell |
5.9% |
6.7% |
9.2% |
7.3% |
5.9% |
7.3% |
7.5% |
|
Chevron |
8.7% |
10.1% |
9.4% |
5.0% |
4.9% |
6.4% |
7.1% |
|
ConocoPhillips |
18.5% |
20.4% |
25.1% |
11.0% |
10.9% |
15.9% |
16.5% |
|
ExxonMobil |
7.0% |
9.5% |
9.7% |
4.2% |
4.4% |
5.3% |
6.0% |
|
ENI |
11.5% |
11.8% |
10.3% |
6.8% |
6.6% |
6.7% |
7.6% |
|
TotalEnergies |
8.2% |
5.9% |
9.0% |
6.7% |
5.9% |
7.2% |
7.6% |
Source: Company accounts, Marketscreener, consensus analysts’ forecasts
“As the globe focuses more on energy security, and looks to wean itself off Russian supplies, it may be that oil firms feel able to invest more in oil and gas production, even as they look to transition to more renewable sources over time. Their bumper profits and cashflows help, too, as do lingering concerns over whether the world is ready to make the switch as fast as we would like, given question marks over whether solar, wind and others are suitable for baseload power; whether the world’s debts and fragile economic position mean now is the ideal time to shift to energy sources which may offer a lower Energy Return on Invested Energy (ERoIE) than hydrocarbons; and whether we have the power transmission, distribution and storage infrastructure to facilitate the dramatic change in energy sources.
“Firms such as Hunting are positioning themselves for the move to renewables but an increase in investment in hydrocarbon production would be of great benefit to them, too, and it is noticeable that the US-quoted iShares Oil Equipment and Services exchange-traded fund (ETF), which has the ticker IEZ, is outperforming both the oil price and the Energy Select Sector SPDR Fund, which trades under the ticker XLE on the New York Stock Exchange.
Source: Refinitiv data
“The iShares tracker fund looks to deliver the performance to investors of a basket of 29 US-traded oil equipment and services providers, including Schlumberger, Halliburton and BakerHughes, while the much bigger Energy Select Sector SPDR Fund looks to do the same for a basket of 23 US-traded oil producers, as well as the biggest oil equipment plays. Its largest holdings include Exxon Mobil, Chevron, EOG, ConocoPhillips and Marathon Petroleum.
“The iShares Oil Equipment and Services ETF is up by 38% in the past year and the Energy Select Sector SPDR Fund by 24%, while the price of Brent crude is down 14% and natural gas, using Henry hub as a benchmark, is down 45%.”
