For the first time in five years, big European oil companies have outperformed their U.S. counterparts in 2023. This shift in performance does not indicate a changing of the guard, as U.S. firms are still valued more highly by investors. Instead, it seems that the Europeans have taken a page from the American oil playbook, focusing more on their core oil businesses and prioritizing shareholder returns.
The big five oil majors consist of Exxon Mobil and Chevron in the U.S., and BP, Shell, and TotalEnergies in Europe. In 2023, Exxon stock has dropped by 8% and Chevron by 15%. On the other hand, BP has seen a 2% increase, Shell is up by 15%, and TotalEnergies has risen by 11%. According to FactSet, the last time the average performance of the two U.S. majors lagged behind the average performance of the three European companies was in 2018.
The paths of these companies on different continents have diverged in recent years. Since 2020, European companies have announced much larger investments in low-carbon businesses. TotalEnergies, for instance, plans to allocate more funds towards solar farms in 2023 than to new oil and gas projects. In comparison, less than 10% of Chevron's capital expenditures are dedicated to low-carbon operations. Neither Chevron nor Exxon are currently investing in renewable energy sources like wind and solar.
Investors typically value low-carbon businesses at lower multiples than oil and gas businesses, especially as oil prices have rebounded from the lows caused by the Covid-19 pandemic in 2021. Returns on investments in oil and gas projects have exceeded 20% over the past two years. On the other hand, returns on low-carbon operations can vary, with offshore wind power expected to yield less than 10% returns.
These diverging trends are reflected in the companies' valuations. Exxon and Chevron are both valued at 10.6 times their expected earnings in 2024. In contrast, BP is valued at 6.6 times, Shell at 7.8 times, and TotalEnergies at 6.7 times.
However, in 2023, the European companies have slightly changed their approach. While they still plan to allocate more funds towards low-carbon efforts compared to the American majors, they have also emphasized their commitment to fossil fuels.
BP's Modified Approach to Oil Operations
In February, BP announced a revision to its plans, choosing to gradually wind down its oil operations rather than the previously expected accelerated phase-out. Additionally, the company unveiled a significant increase in its budget for fossil fuel production, allocating an additional $1 billion per year until 2030. Despite BP's claim that this decision did not signify a retreat from its climate change commitment, critics strongly disagreed with the company's approach.
Shell's Adjusted Strategy
Not long after, in June, Shell made headlines by announcing its intention to maintain oil production levels until the end of the decade. This shift followed previous statements from Shell indicating a decrease in oil production. The company justified this change by explaining that a prior divestment of oil properties still allowed them to meet climate goals. Shell CEO Wael Sawan emphasized the potential dangers of a swift global phase-out of oil and gas. Additionally, Shell revealed plans to allocate 30% to 40% of cash flow from operations towards buybacks and dividends, surpassing their previous target of 20% to 30%.
TotalEnergies's CEO Stance on Fossil Fuel Production
Patrick Pouyanné, CEO of TotalEnergies, echoed the sentiments expressed by his peers in the industry. Pouyanné emphasized the necessity of continuing to produce fossil fuels, stressing that an overnight elimination of these energy sources is not feasible. He conveyed this perspective in an interview with CNBC.
Operational Setbacks Faced by U.S. Majors
Meanwhile, U.S. majors encountered challenges throughout 2023. Chevron experienced delays in one of its projects located in Kazakhstan. Furthermore, both Chevron and Exxon faced criticism from investors due to their large acquisitions. Chevron announced its intent to acquire Hess for $53 billion, while Exxon planned to acquire Pioneer Natural Resources for $59 billion. However, since the announcements were made, both companies have witnessed a decline in stock value. The timing of these acquisitions coincided with a considerable rise in oil stock prices, raising concerns that the oil majors may have overpaid for these deals.
TotalEnergies's Reluctance towards Acquisitions
When questioned about the possibility of TotalEnergies pursuing an acquisition, Pouyanné expressed hesitancy, citing the current high oil prices as a deterrent. He reminded industry observers that historically, consolidations are pursued during periods of low barrel prices to yield synergistic benefits. This remark provided a rare opportunity for a European oil CEO to offer insights on the investment decisions of American companies.