Europe’s Oil Majors Will Struggle to Take On US Peers

Costlier production and a shift to low-carbon spending have widened a valuation gap that’s not easy to bridge.

Europe

Welcome to Energy Daily, our guide to the energy and commodities powering the global economy. Today, Senior Reporter Kevin Crowley looks at the key reasons why Europe’s oil majors trade so far below their US counterparts. To get this newsletter sent to your inbox, sign up here.

For much of this year, European oil executives have fretted about why their stock valuations are 40% below US rivals.

On the face of it, Shell Plc, TotalEnergies SE and BP Plc are the victims of a political and investment climate that has given up on fossil fuels, while Exxon Mobil Corp. and Chevron Corp. are unburdened by such concerns.

Rather than a quick fix, like shifting its primary listing to New York, Shell on Thursday pledged to pursue self-help measures.

The London-based oil major will take a “ruthless” approach to capital allocation “to ensure we are delivering the returns that we expect,” Chief Executive Officer Wael Sawan told analysts after the company reported record first-quarter earnings.

It’s not hard to see why Sawan has chosen that path. Shell’s capital spending budget outstrips Exxon’s, despite current production levels being almost 25% lower. Even with a smaller outlay, Exxon is increasing oil and gas output rapidly — notching up 40% growth from Guyana and the Permian Basin in the past year — and has a bigger dividend and stock buyback program.

It’s a similar story at BP. The British oil major expects to spend $17 billion this year, the same as Chevron, which has a market value almost three times larger and pumps 30% more oil and gas. The US firm plans to raise production, albeit slowly, through the late 2020s. BP says its fossil-fuel output will be lower in 2030 than it is today.

Aside from their spending habits, the European majors also have at least three key strategic differences with their US rivals, helping to drive the stock-market discount.

Their earnings rely much more on trading, which commands a lower valuation due to its inherent volatility. Second, they’re investing more heavily in the low-carbon economy, which isn’t yet providing the cash returns that can replace those from oil and gas.

And their share buybacks are seen as less dependable than those of Exxon and Chevron, which have both pledged to maintain current levels in an oil-price downturn, even if that means resorting to using debt or cash-on-hand.

All three factors amount to a valuation gap that’s not easy to bridge. Sawan will reveal his attempts to do so at Shell’s highly anticipated strategy update on June 14. Appropriately, the presentation will be in New York.

Source: Bloomberg.com

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