The shareholder returns adage has now become a fixture of the U.S. oil industry. Large public oil companies are not boosting production despite rising prices and tight supply. Instead, they are returning cash to shareholders. And this might continue, raising the ceiling on prices. From a certain perspective, this is the right thing to do in order to keep shareholders on. The oil industry is going through a reputation crisis right now coupled with the rise of the activist investor whose goal is not only to make money but also to force companies to become more environmentally, socially, and corporately responsible.
The ESG trend in investing has been gathering speed, and fast. Activist investors with an ESG agenda focused primarily on the E have been challenging oil companies’ priorities, and they are becoming increasingly successful. Even Exxon earlier this year announced plans to become a net-zero company by 2050. In the meantime, they remain reluctant to boost production.
Forbes’ Dan Eberhart wrote in a recent article how the ESG trend is affecting the swing-producer status of the U.S. shale industry. The telltale sign that ESG is indeed affecting the industry is the distinction between how public companies—subjected to ESG pressure—are responding to higher oil prices, versus how private companies—who don’t need to make any shareholders happy—are responding.
Citing an Evercore ISI study, Eberhart noted that private oil companies in the shale patch were planning on boosting their capital spending by as much as 42 percent, while public companies were going to raise their expenditure by half that. In fairness, they are still planning to increase capital spending. However, it may not all be spent on new oil production.
The European supermajors are a good example as well. Pressure on the oil industry in Europe is a lot stronger than it is in the U.S., and it comes from more directions. As a result, BP, Shell, and TotalEnergies are not only expanding into low-carbon energy but also planning to slash their oil and gas production substantially to make their shareholders—and governments—happy.
Meanwhile, in the U.S., private drillers are the only ones to pin supply hopes on. In a report from September last year, IHS Markit forecast that U.S. oil output would increase by 800,000 bpd this year, noting most of the increase would come from private, independent oil companies. These companies don’t have shareholders to answer to and return cash to.
Right now, oil is a lot more expensive than it was last September. No wonder then that IHS Markit’s Daniel Yergin in December forecast that U.S. oil production could actually grow by close to a million bpd this year.
“The U.S. is back. For the last year, year and a half, it’s been OPEC+ running the show, but U.S. production is coming back already, and it’s going to come back more in 2022,” Yergin told CNBC at the end of December.
Private oil companies, according to EIA data, account for about a third of all U.S. oil production. This means that while U.S. production of crude oil certainly has space to grow, this space is limited because the public majors are reluctant to revert to total growth amid investor ESG pressures.
Yet, in the end, these pressures may weaken—at least temporarily—in the face of market performance. The oil price rally has pushed energy stocks higher and has motivated the industry to think about production growth. Bank of America recently forecast that drilling and completions spending in the U.S. will rise by 22 percent, versus 25 percent globally. And it also forecast that U.S. oil production could add 900,000 bpd this year, all from the Lower 48.
The ESG investing trend is certainly a force to be reckoned with. Some investors are upping and leaving the oil industry altogether because of this force. Luckily for oil companies, there is always another buyer with perhaps a little lower environmental standards and a little stronger focus on profits.
Global oil supply is falling short of demand, and whatever the morals of fossil fuels, most investors invest not because it’s the moral thing to do but because they want to make money. And such an imbalance between supply and demand in the most used commodity in the world is certainly a context a pragmatic investor would want to be part of. Those who don’t will effectively contribute to even higher oil prices.