Gas prices impact refining costs for heavy oil, and analysts were keen to get a view of how gas market conditions affected downstream margins. More generally, analysts continued to ask companies for their perspectives on current demand recovery and the path forward and its potential impact on margin recovery in 2022. In the LNG business, analysts had several questions on factors that led to high earnings – how much was market-driven vs. factors internal to the company such as contract renegotiation – and the ability to sustain earnings in upcoming quarters.
We live in an era in which oil and gas majors’ strategic decisions have the potential to have existential implications, and the number of questions analysts ask about various strategic options gives us valuable clues about where they think the industry is headed and where it should go. Analysts asked 18 questions about alternative energy businesses, 7 questions about the LNG market, 4 questions about onshore US activities and not a single question about deep-water offshore fields. Analysts raised a point on linkage between the outcome of COP26 and companies’ energy transition strategies. Analysts wanted to understand whether companies that have already announced emissions reduction commitments would be competitively disadvantaged against those that haven’t made any commitments if COP26 fails to reach a meaningful agreement. Some companies were even questioned on how much they were themselves driving their new energy business vs. their dependence on their partners and suitable technologies to drive growth of their new energy business. We should expect these types of questions to continue for as long as there is focus on decarbonization.
Operational matters, as usual, took a back seat. Major project updates, production outlooks and the performance of US onshore projects accounted for over half of analysts’ questions. Analysts had significant interest in the Permian Basin and whether companies had any plans to accelerate activity levels in the Permian and other short-cycle plays. Analysts also indicated concern around companies’ shrinking upstream business and its likely impact on companies’ production outlook.
Looking at the remainder of this year, oil prices should continue to be supported by lean inventories. Europe went into the heating season with gas inventories below levels of recent years, and LNG markets are likely to remain tight. All of this means that companies will have good choices to make when it comes to how to use cash. Decarbonization strategy, alternative energy projects and the use of capital to support the legacy business will continue to remain focus areas for equity analysts.