Europe’s major oil discount is getting more brutal

Reuters
Reuters

LONDON (Reuters Breakingviews) – Europe’s big oil companies will be wondering what to do next. Although Shell, BP and TotalEnergies all reported bumper first-quarter profits amid soaring oil prices, their valuations are lower than those of US rivals Exxon Mobil and Chevron. The disconnect is getting weirder and weirder.

Over the past three months, Total and Shell, which published https://www.shell.com/investors/results-and-reporting/quarterly-results/2022/q1-2022/_jcr_content/par/toptasks_1119141760_.stream/ 1651682600274/4beba247de9a1e5dcdbc1685abfdc95d07aca3f7/q1-2022-quarterly-press-release.pdf on Thursday made the same net profit of $9 billion as Exxon. BP and Chevron both earned about $6 billion. Refinitiv’s estimates for year-end EBITDA and earnings show a similar trend. Yet Chevron and Exxon are trading with 11 times those earnings and 6 times their expected EBITDA after including debt, while the Europeans languish with 5 and 3 times respectively. Free cash flow will represent 18% of European market capitalizations in 2022, Jefferies estimates, compared to 11% for Americans.

There is a practical reason for this. Exxon and Chevron have been slower than their peers across the Atlantic to commit to low-carbon activities like renewables, at a time when oil and gas prices above $100 a barrel are rewarding fuels fossils. Over the past six months, stocks in the US pair have outperformed their European peers.

There is also a technical reason. The US market is more dominated by retail investors who blithely link higher fossil fuel prices to equity values. By contrast, some European institutional investors obsessed with environmental, social and governance concerns have abandoned anything to do with oil.

Yet there are growing reasons to believe that Europe’s oil majors might not stay in the shadows. The long term is that at some point their wind and solar arms could become large enough to allow them to be valued alongside big renewable players like Spain’s Iberdrola, which trades at 10x EBITDA.

The counter-argument is that these renewable revenues are in an uncertain future, as Exxon and Chevron invent it here and now. But Americans may not continue to reap windfall profits because they are not investing in new wells as much as high prices imply. More importantly, the three Europeans have particularly large trade arms. While none of the majors make it easy to say how much of their profits come from this business of securing supplies and profiting from pricing inefficiencies, bankers say it matters. Today’s dislocated markets are also ideal hunting grounds. Over time, shareholders might realize that.

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BACKGROUND NEWS

– Shell on May 5 announced a profit of $9.1 billion in the first quarter, compared to $3.2 billion in the first quarter of 2021.

– The British oil group beat its previous highest quarterly profits recorded in 2008, even after writing down $3.9 billion after tax following its decision to exit its operations in Russia.

– Shell said its dividend payments and share buybacks reached $5.4 billion in the quarter, part of its $8.5 billion share buyback plan in the first half. Distributions to shareholders for the second half of 2022 are expected to exceed 30% of cash flow from operating activities, compared to a range of 20% to 30% previously.

– Net debt fell to $48.5 billion from $52.6 billion at the end of 2021.

– At 0725 GMT, Shell shares were trading at 22.95 pounds, up 3.2% in early trading.

(Editing by Neil Unmack, Streisand Neto and Oliver Taslic)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Mary I. Bruner