It is increasingly looking like COVID-19 could be Big Oil’s Kodak moment. For over a century these firms have been titans of business, offering a steady financial return in good times and bad.
But most importantly, they have been immovable pillars of stone for investors in times of turmoil. Whatever the financial weather, the companies rewarded their investors.
Although we are in times of trouble now, the supermajor oil companies, which we often describe as Big Oil: BP, Chevron, Eni, Exxon, Shell, Total, and ConocoPhilips, are anything but a safe bet right now.
In the words of the business paper of record, the Financial Times: “Supermajors’ status as reliable income stocks questioned as earnings plunge.”
Yesterday the shares in Shell, which was the biggest dividend payer in the FTSE 100 last year, fell 11 percent as COVID-chaos ripped through the company’s finances, just as the pandemic had played havoc with BP’s finances earlier in the week. Shell’s share price has fallen 40 percent this year.
The COVID-crisis is so bad that Shell has just done the unthinkable: it has cut its dividend. Do not underestimate this moment in the ongoing story about the end of the age of oil.
Mark Lewis, head of climate change investment research at BNP Paribas, told the Financial Times there was “tremendous symbolic importance” to Shell’s dividend cut, adding: “What does this mean going forward as to whether oil and gas companies continue to be viewed as reliable income stocks?”
One Guardian columnist summed it up perfectly. “A pillar of the UK stock market has tumbled. Shareholders have been sure of Shell’s dividend since the second world war, but now the distribution has been cut by two-thirds. The chief executive himself called the decision ‘monumental'”. He dryly noted that the title on Shell CEO Ben van Beurden’s bookshelf as he spoke to investors somehow “captured the mood.” It was the Fall of Giants, by Ken Follett.
The FT adds that the “investment case for oil is coming under greater scrutiny” like never before. “If companies curb their payouts without showing they can remain financially robust as they shift towards greener businesses, concerns will mount over Big Oil’s place in investment portfolios.”
Shell is in trouble. BP is in trouble. So too is Exxon.
A remarkable investigation by Bloomberg into Exxon looks at the oil giants troubles with COVID-19 but also its recent corporate strategy, including its failure to invest in renewables: “Perhaps no company has been humbled as profoundly by recent events as Exxon”, reports Bloomberg. “The coronavirus has laid bare a decade’s worth of miscalculations.”
Another titan is falling: “Once the undisputed king of Wall Street, Exxon today is worth less than Home Depot Inc., which has less than half the revenue,” notes Bloomberg. It is not alone: “Energy now makes up less than 3% of the S&P 500 Index, compared with more than 10% in 2009.”
Kenneth Medlock III, senior director of the Center for Energy Studies at Rice University’s Baker Institute for Public Policy told Bloomberg, “You’re seeing fragilities exposed. COVID-19 is doing things that nobody could have imagined.”