BP and Shell go back to basics to boost shareholder returns

Shell and BP had a simple message for investors at their latest results: boring is back.

After years of headline-grabbing management changes, splashy deals and ambitious attempts to woo ESG investors with forays into low carbon businesses, the two UK-listed oil majors have promised to focus on their core business and return as much cash as they can to shareholders. 

“We’re return-driven,” said Murray Auchincloss, the low-key Canadian former finance chief who stepped up to run BP in January after Bernard Looney was fired for serious misconduct. “We’re really, really driven by returns,” he emphasised in BP’s first-quarter earnings call this week. “It’s all going to be return and cash flow-focused.” 

Wael Sawan, who became Shell’s chief executive a year earlier, had the same message, as he repeated that the company’s “pragmatic approach” would see “enhanced shareholder returns”, “attractive shareholder returns” and would deliver “even more returns”. 

In the past two quarters, BP and Shell stressed their focus on “cash flow” 58 times on earnings calls, more than twice as often as they had in the previous two quarters, according to transcripts analysed by AlphaSense. 

The goal is to persuade the stock market to revalue their shares upwards and try to close the discount with their US peers. “These stocks are obviously not growth stocks. This is a cash sector. It’s managed for cash. So what I look for is cash generation and free cash generation,” said Irene Himona, an analyst at Bernstein.

“It is about trust,” said one veteran energy banker. “Investors do not trust Shell and BP to do deals, they want to see consistent returns.”

In the first quarter, Shell came in almost 20 per cent above profit expectations at $7.7bn, as its huge liquefied natural gas and trading business delivered $1bn more profit than Biraj Borkhataria, an analyst at RBC Capital Markets, had expected. Meanwhile, after paying higher costs for finance and a bigger tax bill than expected, BP disappointed, coming in slightly below expectations with a $2.7bn profit.

Both FTSE 100 groups pledged to keep up their distributions to shareholders. Both said they had no plans to move their listings to New York in the hope of closing a valuation gap with their US rivals that opened up in 2008, when American majors started pumping significant amounts of low-tax shale oil and gas.

The biggest casualty of the shift in approach has been the strong focus on building expertise in greener forms of energy, espoused by previous chief executives of Shell and BP. 

Borkhataria said that after a few years of investing in everything from wind and solar to untested businesses such as biofuels, hydrogen and carbon capture, the two companies had discovered that they could not simply create new markets from scratch. “You need the rules to be in place, the policies in place, the buyers to be in place and so on. You can build something and hope the buyers come, but you cannot do that to a large scale,” he said.

Shell has now trimmed its target for capital spending on low carbon projects to 19 per cent by 2030, significantly less than the 23 per cent it spent last year.

“There’s no access to capital now [for renewables],” said the energy banker. “A lot of that capital expenditure is fixed, so in Shell’s case going down to 19 per cent does not leave much marginal capital available.”

At BP, Auchincloss suggested to analysts that while he would not pursue any oil and gas deals with the oil price above $80, he might take an interest in cheaply valued low carbon assets. On Thursday, BP said, for example, that it was interested in buying Tesla’s electric vehicle charging network in the US.

BP still has a target to spend 50 per cent of its capital expenditure on low carbon projects by 2030, but last year reduced its spending by more than a third to 18 per cent.

Borkhataria described the 50 per cent target as “aspirational” and noted that to hit it, BP should be spending “a very significant amount of capital today” on energy transition projects. “That capital is not being put to work,” he said. 

To hit their existing targets to reduce the carbon intensity of their business by 2030, Accela Research, an investor-advisory group, estimates that BP will need to spend an additional $71bn on top of its existing commitment to spend $53bn, and Shell will need to spend an additional $53bn on top of its plans to spend $33bn.

Auchincloss told the FT that BP remained “committed to the [low carbon] strategy” but added that “we just have to be pragmatic and make sure we make the returns that we promise to shareholders”.

Sawan said Shell’s strategy is to double down on its strengths: the huge LNG business it built with the acquisition of BG Group in 2016; its sizeable network of filling stations; its deepwater oil production arm and its trading business, which Borkhataria and Himona both estimate was responsible for about 25 per cent of earnings last year.

“What we are going to do over the coming years, at least through 2030 and potentially beyond, is continue to grow our LNG business . . . stabilise our oil production at around 1.4mn barrels per day . . . and aim to transform our customer-facing businesses,” Sawan said. 

Auchincloss, meanwhile, pointed to the 30 final investment decisions that are waiting to be made on oil, gas, refining and energy transition projects. Only after those are decided, he said, will he know the medium-term shape of BP’s business.

Meanwhile, both companies are leaving unspoken how they will balance their focus on their core business, and returning a large share of the proceeds to shareholders, while managing to meet their promise of getting to net zero by 2050.

“The issue is trying to do it all,” said Shu Ling Liauw, chief executive of Accela Research, adding that BP and Shell cannot commit both to “unrealistic distributions [to shareholders] in the short term” while also creating options for their revenues after oil demand peaks. “There are very real trade-offs.”