Supermajors, are they creating value?

Comparing fuel prices as we commute to work, take the kids to school, visit friends and family, or even on our way to do the shopping at our supermarket of choice is becoming the norm for many of us living in the United Kingdom (UK). The price of filling up the average family car has soared to record highs since the conflict began in Ukraine. Experian Catalist data suggested that fuel prices would rise to a record high of c£100 to fill up the average-sized family car, leaving many people unable to afford the running costs of owning a vehicle. Are the supermajors profiting from the conflict in Ukraine, or is it simply a consideration in an economy that is suffering at the hands of inflation?

Consumers are feeling the financial implications of inflation and the cost-of-living crisis. Unsurprisingly, price comparisons for commodities have become part of our daily lives. Recently, the AA and RAC both concluded that the retailers and oil giants could be doing more to pass their profits onto the customers at the pumps. BP has recently published its profits for Q2, and it doesn’t make very encouraging reading for those struggling to fuel up at the forecourts. British Petroleum (BP) has raised astonishing profits of $8.5 billion. To put this figure into context, that is more than triple the profits raised during the same quarter the year before, totalling $2.8 billion. As BP reported the highest profits recorded in 14 years for Q2, share prices increased by 3%, thus creating shareholder value. However, BP is not the only so-called "supermajor" to be reporting record profits; Shell has announced profits of $11.5bn for Q2, which surpasses the profits reported for Q1 ($9.13bn) by a huge 26%. So, how are these profits being utilised if they are not being passed on to the consumers?

BP has recently announced a 10% rise in dividend payments to shareholders and also a buyback totalling $3.5 billion. Shell announced a similar plan the previous week, and although the dividends would remain at a modest $0.25 per share, they would buy back shares worth $6bn. Does this signify that shareholders are at the front of the queue or that companies are investing back into the economy and projects to raise corporate value in the future? The UK government’s commitment to reduce greenhouse-gas emissions by 2050 to net zero would have a significant impact on the profits gained from oil and gas.

Oil and gas companies must be able to strike the right balance between ensuring shareholder value is met by generating the required rate of return, investing in products that will increase future market value by determining the amount of capital to be invested in projects, and utilising low-carbon technologies to generate green energy while maintaining a positive performance spread. This has become an issue for shareholders due to the unknown returns on capital invested. The renewable energy sector would not produce the same rate of return for investors due to the nature of these long-term projects. Undoubtedly, this will harm share prices without being able to specify the return on investment (ROI).

The Big Oil companies will be judged by the court of public opinion on decisions made from an ethical perspective and on their actions regarding corporate social responsibility. If the profits are not passed on to the consumer through a reduction in the price of energy, especially during the cost-of-living crisis, it would be expected that investments are made in infrastructure or means of targeting greener energy. BP announced in March 2022 that it would be investing £1bn in electric vehicle (EV) infrastructure by installing charging points throughout the UK. During the annual general meeting (AGM), BP won the backing of its shareholders (88.53%) over its climate strategy, which largely involves cutting greenhouse gases from the production and sale of gas and oil. The strategy was undoubtedly required to mitigate against the company value destruction that would be caused by the current climate crisis. Shareholders, however, voted against a resolution that would have seen a strategy built on tougher emission targets, with only 14.86% showing support compared to 20.6% in 2021. The profit value obtained in the current climate may have been too much for shareholders to ignore. The short-term risks seem to have prevailed over the medium and long-term risks.

References

Arnold, G., Lewis, D. (2019). Corporate Financial Management, Sixth Edition. Pearson Education Limited.

Bousso, R., Shadia, N. (2022, May 12). Retrieved from Reuters: https://www.reuters.com/world/uk/bp-chief-says-uk-windfall-tax-would-not-affect-investment-plans-2022-05-12/

Campbell, P., Wilson, T., Thomas, N. (2022, August 03). UK Business & Economy. Retrieved from Financial Times: https://www.ft.com/content/fae4a656-f871-4ea1-b4ef-19701b9876a1 

Lancefield, N. (2022, June 08). Business. Retrieved from Independent: https://www.independent.co.uk/business/petrol-prices-uk-cost-of-living-b2096406.html 

Lepic, B. (2022, August 02). News. Retrieved from Rig Zone: https://www.rigzone.com/news/shell_makes_record_profits_for_two_quarters_in_a_row-02-aug-2022-169832-article/

Wilson, T. (2022, May 05). Shell plc. Retrieved from Financial Times: https://www.ft.com/content/b2713bd1-afa5-4638-ab2d-be0c4e8a7ab7