It seems someone was listening. A short time later, Shell dropped plans to build a new gas-to-liquids plant in Louisiana – a highly ambitious project that would have tied up several billions of dollars.“The penny seems to have dropped,” says Mr Wheaton, manager of Allianz Global Investors’ Global Energy fund.
Mr van Beurden has probably been inundated by such advice in the past few months from irate shareholders alarmed by what is afoot at Shell. A fortnight ago, it issued its first profit warning in ten years, telling the market its fourth-quarter earnings would be $2.9bn – down 48 per cent year on year.
Analysts at Credit Suisse say the warning was a harbinger of weak results across the European oil sector, which has been hit by factors ranging from weak refining margins and higher exploration expenses to unrest in Libya. The bank cut its earnings-per-share estimates for the European group by 22 per cent.
Despite all the headwinds, western oil companies are holding up well against some of their rivals. Last year, majors such as Total of France and Chevron of the US outperformed national oil companies from China, Russia and Brazil in terms of stock market valuation.
But by other comparisons, they are doing worse. Morgan Stanley says Europe’s integrated oil companies underperformed the broader European equity market by about 37 per cent since the start of 2012.
Meanwhile in the US, Chevron’s shares have risen 1 per cent and Exxon’s 5 per cent over the past year, while the S&P 500 is up 22 per cent.
The root of the problem is concern about spending. Over the past few years, all the western majors have increased capital expenditure as they venture into ever more challenging regions and take on more complex projects.
But, at a time when industry costs are rising and oil prices are stagnant, many think companies should be spending less, not more. Pressure is building on them to plough their earnings into higher dividends and share buybacks rather than increasingly expensive new ventures.
“Investors are fed up with always being so low down in the queue for cash flow,” says Mr Wheaton.
Shell stands out in this regard. Europe’s largest oil company by production, Shell’s capital investment rose from $27bn in 2007 to $44.3bn in 2013 – but that has not translated into a better financial performance. Instead, Martijn Rats of Morgan Stanley wrote in a recent note, the company has seen falling profits, weakening returns and deteriorating free cash flow.
Shell’s return on average capital employed – a key metric in the oil industry – was relatively steady at about 20 per cent during the mid-to-late 2000s, but more than halved to 9 per cent last year, Mr Rats says.
Meanwhile, free cash flow is not growing nearly as quickly as Shell management said it would. The company said in 2012 that it would generate $200bn of operating cash flow over the ensuing four years. But so far, it has only realised about $40bn a year, putting it well behind its target.
That is a dilemma for Mr van Beurden, who moved into the top job at Shell at the start of January. Many expect him to modify or even abandon some of Shell’s objectives when he gives his first strategy presentation in March.
“He has to reset the cash flow target,” says Charles Whall, co-portfolio manager at Investec Asset Management. “He has to do it from a credibility perspective.”
But such issues are not unique to Shell. Even ExxonMobil which reports fourth-quarter earnings this Thursday – a day ahead of US rival Chevron – is no longer generating enough cash to cover capex and payouts to shareholders, according to Robert Kessler of Tudor Pickering Holt & Co.
He says its free cash flow fell short of shareholder distributions by $10bn in 2012, and the gap will be $9bn in 2013. Meanwhile, net debt has risen as the group borrows to cover the shortfall.
Mr Kessler thinks something has got to give – and ultimately it will be spending levels. “In future, the majors are going to be more selective about capex,” he says. “They’ll complete their big capital projects and then let free cash flow grow.”
Already, there are signs of this more choosy approach. Norway’s Statoil, in particular, has deferred a number of oil projects in the North and Barents seas, and recently shelved an export plan for its Kristin gasfield in the Norwegian Sea because of rising costs.
Total cheered investors last July when it said its capex would peak in 2013 and start falling in 2014. Chevron also said it planned lower capital spending this year than in 2013, which it described as a relative peak year for investments.
The spending slowdown is being combined with an increase in the pace of divestments. BP said in October that it would sell a further $10bn of assets by the end of 2015, on top of the $38bn in disposals made since the 2010 Deepwater Horizon disaster.
Shell is also expected to speed up divestments. Analysts say it must sell at least $14bn worth of assets if it is to stay within its current financial framework. It took a first step along that road last week, announcing the sale of its stake in the Wheatstone LNG project in Australia to a Kuwaiti company for $1.14bn.
Investors appear to be giving Mr van Beurden the benefit of the doubt. Shell’s shares have moved up by 7.6 per cent since the start of December. “A new face brings hope,” says Neill Morton of Investec. “People were taking a bet that he would do things differently.”
Tellingly, even Shell’s profit warning failed to put a big dent in the rally. For Mr Wheaton, that was a sign that, despite the drip-drip of bad news from the sector, “people want to own Big Oil”.
The majors may be languishing, he says, with valuations at multiple-year lows – but “there’s a feeling that a turnround is coming. And investors want to buy into it”.
Source;- ft.com
