Given the expectation of tight crude markets for the foreseeable future, analysts were most interested in companies’ upstream capex plans, particularly for companies that had already announced spending increases. Analysts were keen to understand how incremental spend would be allocated between short- and long-cycle projects.
Not surprisingly at this time of year, analysts were curious about companies’ capital spending plans for 2022 and the range of possible outcomes. Analysts tried to gauge the amount of flexibility companies had built into the top end of the range of their guidance by asking how they would respond to continued high oil prices. Given the expectation of tight crude markets for the foreseeable future (an expectation that appears to be realized), analysts were most interested in companies’ upstream capex plans, particularly for companies that had already announced spending increases.
Given the uncertain long-term outlook for hydrocarbons, analysts were also keen to understand how incremental spend would be allocated between short- and long-cycle projects. Cost inflation was a key point, and the impact of labor and material cost on returns weighed heavily. On a related note, analysts probed to understand whether projected capex increases for 2022 were driven by higher activity levels or inflation. On trading, volatility in international gas markets led to questions about how much impact trading businesses had on companies’ bottom lines during the current quarter, whether those results were transitory and how trading businesses might perform in future quarters.
Decarbonization continued to remain the most important strategic theme. As the EU green taxonomy is implemented this year, it may begin to guide the environmental, social and governance (ESG) strategy of European investors, and analysts are interested in knowing how companies are likely to score. Companies’ response to current geopolitical tensions have highlighted investor focus on non-economic factors. Additionally, analysts pushed for more disclosure of carbon intensity at the asset or region level to get a view of the relationship between asset returns and emissions, particularly for projects not meeting industry benchmarks.
On mergers and acquisitions, analysts checked for companies’ appetite to acquire renewable energy companies vs. organic growth, perhaps reflecting eagerness for companies to grow those businesses and to understand their capacity to build them from scratch. In parallel, analysts also wanted to know companies’ willingness to go beyond the asset disposal plans already announced if high commodity prices are reflected in valuations. On the subject of commodity prices, analysts were, as always, keen to get companies’ views.
The production outlook for 2022 emerged as the most important operational theme. Analysts were curious if higher production levels in 2022 would be driven by higher activity levels or more efficient operations. It is unclear how much flexibility companies might have in the short run, but it is likely that long-term investment and production plans are already being reworked in light of recent events. Reflecting a consensus that gas markets have more long-term upside, they probed to understand the mix of production growth between oil and gas. With high and volatile gas prices, questions naturally arose about companies’ strategies for entering into long-term contracts or staying in the spot market. As always, analysts also checked for updates on companies’ major projects and the level of maintenance activity expected in 2022.
Looking forward
Oil and gas markets are facing continued volatility in the face of geopolitical risk and lean inventories. Upside risks that were present at the end of Q4 have already been realized, turmoil has accelerated, and expectations have never been more in flux. In light of all of the uncertainty, allocation of cash between legacy businesses, alternatives, dividends, and buybacks, return on capital and progress on decarbonization will continue to be a focal point.
Summary
Oil and gas markets are facing continued volatility in the face of geopolitical risks and lean inventories. Questions remain about the longer-term prospects for hydrocarbons, and allocation of cash between legacy businesses, alternatives, dividends and buybacks, return on capital and progress on decarbonization will continue to remain focus areas for investors.