High oil and gas prices boosted forecast-beating 2021 profits for Shell and BP, and are expected to continue doing so this year, allowing both U.K. energy giants to strengthen their balance sheets for energy-transition investments.
After the coronavirus pandemic shocked the energy industry in 2020, oil and gas companies have bounced back. Prices soared going into the winter of 2021 as supply growth couldn’t cope with recovery in hydrocarbon demand.
Brent crude prices
have risen 50% over the past 12 months, surpassing $90 a barrel for the first time since 2014. And the spike in gas prices has been even more dramatic, with the European regional gas benchmark, the TTF, breaking records in recent months.
Now, with many FTSE 100 companies reporting 2021 accounts to the market, the extent of the energy shortage’s boost to oil and gas profits is clear to see.
which had booked a $21.68 billion loss in 2020, swung to a $20.10 billion profit for 2021. For shareholders, this fed into a 37% dividend increase for the year and $3.5 billion in share buybacks.
Underlying earnings in the fourth quarter were 22% ahead of consensus, as the company’s integrated gas division had its best quarter since its performance started being reported separately in 2016. Shell said its liquefied natural gas trading profits increased in the period, but didn’t disclose exact figures.
Shell’s enormous LNG business differentiates itself from competitors. The company controls around 20% of global liquefaction capacity and the LNG shipping fleet. This allows it to take advantage of price discrepancies between different gas regions on the spot LNG market, sending the super-chilled fuel to countries that are willing to pay more. In 2021 this proved to be a boon as supply worries caused price volatility.
RBC Capital Markets said Shell is its preferred energy major for 2022. “On our bullish commodity forecast, Shell generates significant amounts of cash, supported by its oil leverage and number-one presence in an extremely strong LNG market,” the bank said.
Berenberg analysts are similarly optimistic about Shell’s prospects for this year. “After a stellar year for cash generation, the outlook for 2022 is even better, particularly for the integrated gas business,” the analysts said.
recorded a $7.57 billion profit for 2021, with adjusted earnings rising to an eight-year high. The full-year dividend was 18% lower than in 2020, but shareholders pocketed $4.15 billion via buybacks.
Significantly, high commodity prices allowed the company to reduce net debt by more than $8 billion throughout the year. “Following significant debt pay down, we see the company in much better shape than a few years ago,” RBC said.
However, BP remains less favored by analysts than its UK peer. According to FactSet, 60% of polled analysts have a buy or overweight rating on BP, whereas the figure for Shell is 80%. Some have expressed concerns about BP chief executive Bernard Looney’s bold energy transition strategy.
Jefferies has warned that, with high cash generation and lower debt levels, oil-and-gas companies may turn to large-scale acquisitions to accelerate their low-carbon transitions. The bank said BP looks more likely than its peers to undertake expensive acquisitions, as it has a renewable energy target of 50 gigawatts by 2030. Its installed capacity as at the end of 2021 was just 1.9GW.
BP Chief Financial Officer Murray Auchincloss said in a meeting with analysts on Tuesday that the company has a $14 billion-$16 billion long-term capital expenditure budget, of which 40% will focus on the transition by 2025. “We’ll be pursuing modest things,” he told Berenberg.
Also at the event, Mr. Looney emphasized that BP’s transition toward a greener future isn’t just about building renewable projects, and that the other areas of growth-bioenergy, electric vehicles charging, hydrogen and convenience-will generate much higher returns.
“It’s a three-part strategy, of which low carbon is one. But importantly, in the transition, we talk about five growth engines. And $2 billion to $3 billion [earnings before interest and taxes by 2030] from renewables at [returns of] 8% to 10% is one of five elements in that transition,” he said.
Citi said it isn’t clear whether the market will have the patience to reward BP’s transformation strategy, as it will consume considerable near-term capital for an earnings delivery that is loaded to the back-end of this decade.
For now, the rise in oil and gas prices seems enough to lure investors. BP shares have soared by 58% in the last year, while Shell has risen 47%.