Executives at big oil and gas companies, at least the European ones, have spent the past two years trying to change the narrative. The likes of BP and Shell have trumpeted their net zero plans, declared themselves to be “transitioning” to a cleaner energy future and talked up the historical significance of new targets. Think of us as part of the solution, was the message.
To climate activists and politicians demanding faster decarbonisation, the industry’s reply has been that switching off investment in oil and gas too quickly would create a supply crisis: instead what’s needed are “integrated” energy companies that can recycle cashflows from hydrocarbons and build the green infrastructure of tomorrow.
And, up to a point, the pitch has worked. The heaviest pressure has been directed instead at those industry giants viewed as disengaged laggards or refuseniks. Remember how tiny hedge fund Engine No 1 managed to get transition-minded candidates on to the board at ExxonMobil, while at Chevron, 61% of investors backed a proposal from Dutch campaign group Follow This to force faster cuts in emissions.
But a year on from BP and Shell’s big announcements, their boards are mistaken if they think they now have a clear run to 2050 and that it’s just a matter of executing shareholder-backed plans. Trouble is bubbling on at least three fronts.
First, note the absence of oil executives, even the transitioning sort, in formal roles at Cop26 in Glasgow. Executives were confined to side meetings because their net-zero goals aren’t deemed to be science-based. That’s because the measurement methodology doesn’t yet exist, the companies would argue. But they are open to the charge of marking their own homework. Governments or voters may yet conclude that last year’s grand declarations simply don’t go far enough.
Second, Shell has been challenged on its integration-is-best thesis. High-profile US hedge fund Third Point says the company has “too many competing stakeholders pushing it in too many different directions, resulting in an incoherent, conflicting set of strategies attempting to appease multiple interests but satisfying none”. It suggests an alternative: split Shell into several standalone units and allow the renewables-focused arm to invest more aggressively, backed by a united set of shareholders. The climate would benefit, it argues.
That last point is debatable, it should be said. The legacy upstream and refining business wouldn’t necessarily cut capital expenditure, as Third Point assumes. And Shell’s renewables business isn’t yet large and may require years of backing from oil and gas cashflows.
Jessica Uhl, Shell’s chief financial officer, also argued recently that 120 years of accumulated technical expertise in energy is vital for delivering complex technological projects such as integrated carbon capture, biofuels and hydrogen facilities.
An activist hedge fund like Third Point primarily just wants, one suspects, a higher share price, but it has ignited a debate. Its argument that “sentimental” attachment to a “super major legacy” results in “incrementalism” may run and run.
Third – and far less nuanced – it’s impossible to miss the vast sums of cash currently being generated by oil companies when a barrel of Brent fetches $85. “We’re a cash machine at these types of prices,” said BP chief executive Bernard Looney last week, promising investors $1bn-a-quarter share buybacks as long as the price remained above $60.
According to this script, none of the spoils of the unexpected cash bonanza will be redirected towards extra investment in renewables, beyond the increase to $5bn a year by 2030 that BP has already pledged.
Is that fair? It’s what was agreed with investors, Looney might argue, but that answer would appear very self-satisfied. Expectations change. What sounded like a big strategic reset a year ago feel less impressive today. Even under its own definition of transitioning, big oil can afford to pick up the pace. To properly change the narrative, it should.
Bailey needs to learn how to lower and raise expectations
Andrew Bailey went on a media blitz after Thursday’s meeting of the Bank of England’s monetary policy committee. It wasn’t just the usual short clips either; Threadneedle Street’s governor did a long turn on Radio 4’s Today programme the next morning.
Nothing unusual in that, it might be thought. But the Bank normally goes to these lengths only when it has actually done something, whereas Bailey was popping up everywhere to try to explain why he and his colleagues had left policy unchanged. That’s a measure of how bad the Bank’s communications have been.
At one point in the press conference announcing the decision to leave interest rates at 0.1%, Bailey said it was “not our responsibility to steer markets on interest rates” – a comment that would raise eyebrows at the US Federal Reserve and the European Central Bank (ECB), where managing expectations is part of the job description. What’s more, when Bailey said last month that the Bank would have to act to curb inflationary pressure, it was a clear attempt to steer markets. As it turns out, a rather ham-fisted one.
Nor is anything much clearer now. After surprising the markets by its inaction, the Bank’s current message is that interest rates will need to rise in the coming months – but only if post-furlough data from the labour market is strong enough to warrant such a move.
Bailey deserves to be cut some slack. He is still relatively new to the job and deciding what to do about interest rates is not easy when the economy is both slowing and being hit by cost increases for the most part beyond the control of the Bank.
That said, he needs to study how other bank governors communicate. Mario Draghi, former head of the ECB, was an absolute master at getting his message across. By comparison, Bailey looks a novice.
London’s flotations look a lot less buoyant
Two months ago, London’s crop of newly floated businesses appeared in fine fettle. In September, THG, Britain’s great e-commerce hope formerly known as The Hut Group, was valued at GBP8.3bn, while Darktrace, the cybersecurity firm set up by mathematicians and former spies, had a market capitalisation of GBP7bn. Today, investors value both combined at barely north of GBP6bn.
Shares in loss-making Manchester-based THG, which runs retail websites such as Lookfantastic and Zavvi, have cratered as investors reassess the prospects of the business model and the level of control held by its leader and 22% shareholder, Matt Moulding. From a high of 800p in January, the shares hit a low of 198p last week, far below last September’s 500p launch price – at the time the biggest London Stock Exchange debut since Royal Mail in 2013. The gyrations suggest investors are struggling to value tech plays on the capital’s market.
The same is true of Darktrace, which floated in April at a conservative 250p, before racing in value from GBP1.7bn to GBP7bn. However, a recent critical analysts’ note and fears of a mass sell-off of stock by insiders have seen its share price almost halve.
While the LSE still has some winners – notably fintech firm Wise, which has held its value since becoming the largest-ever listing of a UK tech company earlier this year, and the stellar debut of biotech firm Oxford Nanopore in September – there is now caution in the air.
Last week, industrial products provider Rubix Group canned a planned IPO in London, citing “difficult ongoing conditions”, having announced the intention to float only last month. Similarly Marley, the biggest producer of roof tiles in Britain, abandoned its GBP500m IPO – blaming “market volatility” – less than three weeks after announcing it.
Add the experience of Czech fleet services firm Eurowag, described as the Uber of trucking, which endured a disastrous debut last month, and it would appear that investors fuelling the red-hot IPO market could be leaving London in the cold.