5 minute read 22 Mar 2021
Oil tanker in mediterranean sea

How Q4 2020 earnings calls explored the challenges of a historic year

By Andy Brogan

EY Global Oil & Gas Leader

Oil & Gas sector leader, speaker and industry advocate, optimist, music addict and avid traveler.

5 minute read 22 Mar 2021
Related topics Oil and gas Strategy

Demand and prices rose in the quarter, but oil and gas companies face tough choices allocating capital between core and renewables business.

This article is a part of the Oil and Gas Quarterly Trends series.

In brief
  • Cash flow decreased and losses were significant in Q4, but these metrics were far better than Q2 numbers during the teeth of the pandemic.
  • Analysts asked repeatedly whether incremental capital spending would be allocated to upstream business or to renewables.
  • US companies are lagging in reducing their carbon footprints compared with their European counterparts, and analysts asked about the pressure to catch up.

2020 may have been the most challenging year the world has faced since the beginning of the oil age. The pandemic, the resulting restrictions on mobility and the impact on economies (and oil demand) dominated for almost the entire year.

In the fourth quarter, the reset continued. Demand grew, albeit at a slower rate than producers would have liked, and production cuts continued to keep the market in rough balance.

Crude oil prices rose continuously during the quarter, with WTI futures trading 20% higher at the end of the quarter than at the beginning. Gas prices were mixed, with Henry Hub futures flat on warmer than normal weather in the US, but Asian LNG prices soaring due to cold weather there and a shortage of shipping capacity.

Oil majors reported a combined net loss of US$25 billion in Q4 — three times the loss reported in Q3, but less than half the loss reported in Q2. Oil majors’ cash flow from operations during Q4 stood at US$20.6 billion, 36% lower than the previous quarter but 81% higher than Q2.

The equity markets looked ahead though, and share prices followed the commodity markets. International oil company stocks finished the quarter 20% higher than they began it. Independents rose more than 30% and service companies rose 60%.

Oil majors reported a combined net loss of US$25 billion in Q4 — three times the loss reported in Q3, but less than half the loss reported in Q2. The equity markets looked ahead though, and share prices followed the commodity markets.

Putting cash to work

During end-of-year earnings calls, as is almost always the case, financial matters dominated the conversation with analysts. Cash flow, capital spending guidance and shareholder distributions garnered the most attention.

Knowing oil prices were higher, analysts were looking for specific guidance as to how much cash flow would be expected to improve and whether cash would be directed toward shareholders, the core businesses or expanding alternative energy businesses. Flexibility was a common theme, with analysts wanting to know if and how capital spending plans might be geared up in the second half of the year if oil prices were to stabilize at current levels or improve.

Analysts highlighted shareholder distributions by reminding companies the market tends to reward companies that provide stable dividends, even when oil prices are low. Analysts asked direct questions about the level at which crude oil prices need to stabilize before companies can start to raise shareholder pay-outs. They also asked if capital return will take the form of share buybacks or dividends.

Striking a balance between core and alternative

Analyst interest in the balance between core and alternative businesses was notable. Companies were asked more than once whether incremental capital spending would be allocated to the upstream business to capitalize on the potential uplift in oil prices or the renewables business.

While analysts acknowledged companies’ aspirations, they tried hard to evaluate the companies’ competitiveness through both financial and strategic lenses. Analysts questioned the feasibility of renewable business plans laid down by the companies asking about core capabilities and comparing returns on their upstream assets with potential returns from their renewable projects.

Analysts posed several questions to companies on their current and targeted gearing levels. The trade-off between keeping debt levels low and preserving credit ratings versus growing non-oil businesses that operate with lower returns and therefore need higher leverage was evident. Recent announcements from credit rating agencies on potential downgrades were clearly on analysts’ minds.

On the strategic front, the commitment of oil majors to low-carbon businesses was a key focus area. Several questions were raised about how far into the future companies expect the renewable business to become material.

US playing catch-up

US companies, lagging in their ambitions relative to peers, were asked how the intense external pressure (from peers, shareholders, credit agencies and others) to reduce their carbon footprints might be influencing board discussions. Analysts probed if US companies have any long-term plans to operate as diversified energy companies, such as their European peers.

Companies continued to high-grade their portfolios by divesting less-strategic assets and focusing investment on projects with higher margins. Questions were sure to ensue. Shifting capital priorities and the optimum size of their upstream business in the long term were a focal point.

Analysts were keen to understand how the change in the US Administration and proposed changes in federal regulation might impact strategy for US Gulf of Mexico assets and the level of risk this could pose.

On policy and regulation, analysts were keen to understand how the change in the US Administration and proposed changes in federal regulation might impact strategy for US Gulf of Mexico assets and the level of risk this could pose.

From an operational standpoint, analysts asked several pointed questions on production guidance. The underlying message from analysts to companies was to maintain the ability to quickly reactivate capital projects and ramp up output when or if oil demand picks up and prices (potentially) spike.

As always, analysts wanted visibility into the progress of major capital projects. With capital scarce and oil and gas projects competing with growing alternative energy projects, analysts were keen to understand capital efficiency, returns, commercial prospects and the link between capital deployment and production guidance.

Top 3 themes and graph

Looking forward

The COVID-19 pandemic will continue to hang over the market until vaccine accessibility is widespread and oil demand returns to normal. When that happens, analysts will continue to focus on the long-term value of oil and gas investments and the trade-offs between investing in businesses with reliable cash flows but uncertain futures.

Look for increasing pressure on companies to lower their carbon footprint while maintaining current results. Analysts will constantly look for evidence of companies’ ability to execute on renewable energy growth and return targets.

  • Scope, limitations and methodology

    The purpose of this review is to examine the key themes arising from the questions asked by analysts during the Q4 2020 earnings reporting season among 11 global oil and gas companies. Identification of the top three themes is based solely on an examination of the transcripts of earnings conference calls. For this analysis, the following companies were included:

    • BP plc
    • Chevron Corporation
    • ConocoPhillips
    • Eni SpA
    • Equinor ASA
    • Exxon Mobil Corporation
    • Repsol SA
    • Royal Dutch Shell plc
    • Suncor Energy Inc
    • TOTAL S.A.
    • Woodside Petroleum Ltd

Summary

If and when oil demand returns to normal after widespread vaccination, the focus on driving renewable energy strategies while maintaining current results will heighten even further.

About this article

By Andy Brogan

EY Global Oil & Gas Leader

Oil & Gas sector leader, speaker and industry advocate, optimist, music addict and avid traveler.

Related topics Oil and gas Strategy