How are major oil companies dealing with declining demand for fossil fuels and how are they transitioning to renewable energies?
By Greg Pustorino
The ongoing coronavirus pandemic has put financial strain on major oil companies across the globe. Oil majors including BP, ExxonMobil, Shell, and Chevron have seen their market capitalization constrict significantly in the last decade. In particular, 2020 has fanned the flames for ExxonMobil, as it lost half of its value since the start of the year. Its current market capitalization of $137.9 billion contrasts even more starkly with its 2007 high of nearly $500 billion. A decrease of over 70%. In the wake of these drops, a Florida startup, NextEra Energy was propelled into the number one spot as the largest US energy company by market capitalization, narrowly beating Exxon with its $138.6 billion market cap.
NextEra is the largest renewable energy producer in North America and one of the largest wind energy producers in the world. In addition, it has sizable nuclear and solar capabilities that contribute to the 14 gigawatts of renewable energy they are on track to generate in 2020. The startup has experienced tremendous growth in the last decade much to the chagrin of the major oil companies. The total returns on an investment into NextEra in 2010, including dividends, would be 600%, compared to the bleak -25% loss on the same ten year investment in ExxonMobil. This discrepancy has been exacerbated by the pandemic, causing major oil companies around the globe to raise $32 billion in debt to continue to pay out stock dividends. On the contrary, NextEra’s dividends were rated as safe as investment grade bonds earlier this year.
As of right now NextEra and ExxonMobil operate largely in different segments of the energy sector. Nearly 70% of NextEra’s profits come from regulated electric utilities in Florida while only 30% comes from selling directly to competitive wholesale markets. Since the two companies have operated in different segments, it raises the question of how well NextEra and other renewable energy startups can compete in less regulated markets where they will have to compete directly with major energy companies like ExxonMobil. It also presents the question of whether renewable focused startups will be acquired by traditional competitors, who in recent years have been pressured by the public to invest more in renewable energy and reduce carbon emissions. When asked both of these questions, NextEra executive Jim Robo said, “I don’t worry about the oil majors at all… The US majors, for them to get into the renewables business, I think you need some kind of tectonic shift in their thinking. I can’t imagine it, honestly. I think time would stand still for the US oil majors to get into the renewable business.”
When pressed further about possible acquisitions from competitors, Mr. Robo responded to the Financial Times that investment by European majors has led to, “some of the worst projects that I’ve seen [in the sector].” The gravity of Mr. Robo’s words are all too apparent as major oil companies have had to increase their legacy oil divisions in order to finance lower-margin renewable energy production. Shell CEO Ben van Beurden said, “We will continue to invest [in renewable energy], but it will not be about how many barrels of oil, or cubic feet of gas . . . but how much it adds to the bottom line.”
Several major oil companies, including ExxonMobil, BP, Chevron, and Total have taken to ‘restructuring’ their business to manage falling market values and a continued public push for renewable energy. ExxonMobil plans on cutting 7,000 to 9,000 jobs by the end of 2022, BP will cut about 15% of its 70,000 workers by the end of 2020, and Chevern will also see nearly 15% of its workforce disappear in the next year.
As solar panels and storage batteries approach the cost of gas-fired generation of electricity, major oil companies will be even more stretched for cash. With little public support for major oil companies and many private institutions decarbonizing their portfolios, the days of traditional energy companies might be numbered. The prices of solar and wind energy are likely to fall below traditional fossil fuels by mid-century. Only time will tell if oil majors can adapt and survive or will be outshined by startups like NextEra. □
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