From IOC to… what?

ENERGEN EXCLUSIVE đź’ˇ


The year 2020 is probably where the word “unprecedented” has been used the most. The COVID-19 pandemic indeed brought unprecedented conditions upon the world, with global economy well into recession and forecasts now looking gloomy.

Unprecedented times as well for the energy industry overall. Rapid decline in energy demand, negative oil prices, refinery idled or mothballed, and LNG carriers used as storage to dampen the loss from destroyed gas demand.

The toll has been heavy in the stock prices of Major oil companies. Year-on-year the market caps of Exxon, Chevron, Total, Shell and BP are down by 50%. This certainly is unprecedented value destruction.

The same stands for the Large-caps of the industry. Companies from the group of ConocoPhillips, EOG, Pioneer and Occidental have also lost on average 47% of their market cap year-on-year.

Lastly the small-caps, or else the pure-play E&Ps, have also lost 58% on average year-on-year from a group of 50 companies.

The verdict: In this unprecedented crisis everyone loses

Talks about peak oil demand already reached, surging COVID-19 cases globally and fears of supply glut with Libya restarting its operations have made the road to recovery even harder for oil companies.

Is there light at the end of the tunnel?

We believe there is a silver lining here. Looking at the same three peer groups (Majors, Large-caps and Small-caps) it appears that the road to recovery might be bumpy – but at least there is one!


In the past six months,

· Large-caps on average have recorded a growth in market cap of 36% on average

· Market has also shown some appreciation to Small-caps with average market cap growth of 31% for the groups

· Oil Majors have recorded market cap reduction of 14% on average

So, does the market favor upstream pure plays compared to Oil Majors?

Possibly. Turning around a smaller organization with only one or two key business segments sounds like an easier job to do compared to a giant integrated oil company. Despite the lack of access to cheap finance, the Large and Small-caps can adapt more easily to the new demand patterns either by consolidating and merging with similar companies, or by taking deeper cuts in their budgets and headcounts.

Not the same stands for oil Majors though. Despite the deep cuts already announced (20-25% Capex and 10-15% Opex cuts), there isn’t much left to squeeze out.

Refining and Chemicals operations where Shell and Exxon are among the global leaders require heavy manning levels due to the complexity of the processes - raising the companies’ headcount by significant numbers.

However, they offer the benefit of vertical integration from oil & gas production to refined products and petrochemicals production giving these companies the benefit of synergies, optimization and portfolio optionality.

It is therefore easy to understand that these are areas that the oil Majors have invested a lot of capital and time in to develop and are likely to remain in these companies’ portfolios.

An exception is BP (although much smaller in scale compared to Exxon and Shell), where they have already divested their Petrochemicals arms to INEOS in an attempt to reduce their debt and overall headcount and transform into a leaner organization.

This crisis is like a water tank with multiple holes

Logic says it is easier to fix one hole rather than five at the same time.

The five holes reflect the multiple business segments and diverse portfolios of Oil Majors. Upstream, refining, chemicals, and integrated gas were largely loss making this year.

And that brings us back to the stock market discussion. Large and Small-caps have been less hammered by the market. Possibly because the market shares the belief that fixing one hole is easier than five…savvy?

Portfolio high-grading and rationalization should be on the agendas of Oil Majors. These energy behemoths are not nimble enough to respond to crises and…unprecedented events. Turning-around five to six business segments in 15 to 20 countries is a cumbersome task.

Maybe transforming from an Integrated Oil Company to an Integrated Energy Company is not a great idea after all. BP’s share price is trading at levels akin to 1994, after the company announced its aspirations, “From IOC to IEC…”.


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