A Shell plant in Torzhok, Russia. Shell is among oil companies that plan to turn into lower-carbon businesses.
Photo: Andrey Rudakov/Bloomberg NewsMajor oil companies are working hard to articulate a vision for their future, but the energy sector’s poor performance shows that many investors aren’t buying it.
Companies including Royal Dutch Shell RDS.A -3.60% PLC, BP BP -3.77% PLC and Total SA have launched plans to turn themselves into lower-carbon businesses. But with low oil prices pressuring the industry’s economics and many investors saying it is too early to know whether the intended transformations will generate significant returns, there is growing skepticism on Wall Street over the sector’s future.
“Just saying that you’re going to start a transition doesn’t mean you’re going to be successful at it,” said Fabiana Fedeli, global head of fundamental equities at Netherlands-based Robeco Institutional Asset Management B.V.
Major oil companies have limited room to maneuver after last year’s lower oil and gas prices hit earnings—and there is no relief in sight with oil prices down 16% since the start of the year after the coronavirus curbed demand. Energy companies are also under pressure from an expectation that U.S. shale’s ability to quickly adjust supply will cap prices over the longer term.
The uncertainty has made investors skeptical about whether companies can boost profits and transform through new investments while paying out hefty dividends.
Energy has been the worst-performing sector of the S&P 500 for the past decade. “Valuations are telling us that investors are losing confidence in the oil and gas sector,” said Nick Stansbury, head of commodity research at the U.K.’s largest asset manager Legal & General Investment Management.
In December, the initial public offering of Saudi Arabian Oil Co., known as Aramco, mostly attracted domestic and regional investors. Many institutional investors outside the country passed on the world’s largest listing, finding it too expensive, people involved in the IPO said.
In another blow to the sector, some investors say some companies’ transformation plans don’t go far enough. On Shell’s latest earnings call last month, Chief Executive Ben Van Beurden made almost as many references to the energy transition and the company’s small low-carbon businesses as he did to oil and gas.
But Sarasin & Partners LLP, a U.K. asset manager, sold around 20% of its stake in Shell last summer, expressing displeasure with the company’s plan to increase fossil-fuel output over the next decade, in an open letter to Shell’s chairman.
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“We were extremely disappointed that, despite your public commitment to act on climate change, [Shell] aims to deliver rising fossil fuel production to at least 2030. We do not view this as aligned with the Paris agreement,” the letter said.
The company has invested $2.3 billion in what is known as new energies, including wind and solar power, since 2016. Over the same period, it spent about $35 billion on its traditional business of exploring for, and producing, oil and gas.
Shell’s share price has fallen by about 25% in the past year.
Another sign that oil stocks are falling out of favor: The dividend yields of companies including Shell, BP, Exxon Mobil Corp. and Norway’s Equinor AS A have been rising. The higher yields are partly the result of falling stock prices. Some companies, including BP and Equinor, have raised their dividends in recent weeks.
While shareholders benefit from high dividends, the companies’ ability to maintain or raise dividends is at risk if oil and gas prices remain low and keep earnings under pressure.
Most energy companies pride themselves on preserving their dividends. Exxon has increased its dividend annually for the past 37 years. Shell hasn’t cut its dividend since World War II.
“Lowering the dividend is not a good lever to pull if you want to be a world-class investment case so [we’re] not going to do that,” said Shell’s Mr. Van Beurden.
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Last year, the weighting of oil-and-gas companies in factor-based indexes—which enable investors to add exposure to particular attributes of a stock, such as growth and value—fell in every category, including yield, value and profitability, according to data from global index provider FTSE Russell. Shrinking company valuations also meant the proportion of energy stocks in the S&P 500 fell to 4% in January, its lowest in at least three decades, having peaked at over 14% in 2009.
Investors have also stopped rewarding the energy sector for amassing reserves of crude, in a sign that climate concerns are altering the way markets value oil companies.
A study published by the National Bureau of Economic Research found that investors view undeveloped crude reserves as a reason to discount a company because of the risk that climate policies will curb future oil demand and leave some resources permanently underground and worthless.
“I definitely think there will be some resources left in the ground from a carbon-footprint perspective,” said Eldar Sætre, CEO of Norway’s energy giant Equinor, speaking to The Wall Street Journal at a recent event in London.
Write to Sarah McFarlane at sarah.mcfarlane@wsj.com
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