Lessons from a Big Oil investor call

I had my research assistant listen to Shell's recent quarterly earnings call. Here's what we learned.

A man is holding a placard during the demonstration against Shell, in The Hague, on April 5th, 2019. Photo by Romy Arroyo Fernandez/NurPhoto via Getty Images.


Big Oil is having a hard time right now.

As much of the world remains on lockdown due to COVID-19, demand for oil has plummeted. CNBC reports that COVID-19 will likely “erase almost a decade of oil demand growth in 2020.” Some analysts speculate this could speed up the arrival of peak oil—“the theorized point in time when the maximum rate of extraction of petroleum is reached.”

This isn’t a thing to celebrate, though. Solving the climate crisis requires a well-managed transition from fossil fuels to renewable energy, driven by a desire to save lives and create better jobs. A pandemic-driven economic collapse is the exact opposite of that—which is why greenhouse gas emissions aren’t declining in any meaningful way, despite huge reductions in oil demand.

Indeed, the most significant side-effect of this whole thing is that workers are suffering. And not just industry-specific workers like rig workers and truck drivers, either. In oil country, “Ancillary businesses like restaurants and lodging are taking a big hit, too,” the Denver Post reports.

These are real people, with real families, struggling to make ends meet. They have no idea what their futures might hold, or how the larger oil industry is going to adapt. That’s because Big Oil’s corporate officers and investors weren’t prepared for a crisis like this. They’re also not prepared for the climate crisis, despite 40 years of warnings from their own scientists.

To find out how Big Oil’s corporate officers and investors are thinking about these dual threats to their industry now, I asked my research assistant, Chris May, to listen to Shell’s recent quarterly earnings call with investors.

These calls are usually garishly long and awash in financial jargon. But they’re valuable windows into how the oil industry is working, because corporate officers are legally required to be honest as possible with investors about the future of their business. And investors don’t shy away from tough questions; this is their money, after all.

Here’s what Chris learned from listening to Shell’s earnings call and related events last week.


Shell admits oil demand may never be the same.

The world is using around 900,000* fewer barrels of oil daily because of the coronavirus pandemic—and Shell’s CEO Ben van Beurden said he doesn’t expect those numbers to go back up any time soon.

“We do not expect a recovery of oil prices or demand for our products in the medium term,” he said in a press briefing last week.

Shell’s Chief Financial Officer, Jessica Uhl, echoed that sentiment, telling investors that the drop in demand—which is seven times steeper than the last financial crisis—might never rebound. “We are looking at a major demand destruction that we don't even know will come back,” Uhl said.

But Shell also says it expects production to return to normal. 

Later in the call, however, Uhl also told investors that Shell doesn’t expect any permanent reduction in the amount of oil they produce. “We do expect production levels to go down...but the expectation is that, on balance, this won’t be a permanent reduction for us.”

Shell says it will continue to make money despite the pandemic.

Before the call, Shell announced that its investors would be receiving $10 billion less than they had been expecting, because of the industry’s crash. This was the first time Shell rolled back investor payouts since the 1940’s.

Naturally, investors wanted assurances that banking on Shell was still a good bet. After all, in January, van Beurden said cutting investor payouts was “not a good lever to pull if you want to be a world-class investment.”

On the call, van Beurden reassured investors that Shell is “well-positioned to maintain the resilience, prospects and performance of this company.”

But Shell also says the value of its assets might plummet.

On the same call, however, van Beurden repeatedly referred to a “crisis of uncertainty.” At one point, he admitted: “Who knows where the viability of our assets will go?”

It’s a good question. Late last year, Shell adjusted the value of its assets downwards to the tune of $2 billion dollars. It wasn’t the only energy company to do so, either. As early as 2015, central banks raised alarms about the risk of investing in hundreds of billions of dollars worth of fossil fuel assets that could be rendered worthless, since most fossil fuel reserves must be left unburned if global temperature targets are to be met.

Shell says renewables may be more profitable than fossil fuels.

Some of Shell’s investors expressed concerns about the company’s recent announcement to go carbon neutral by 2050.

(Note from Emily: Yep, that’s right—Shell recently made an announcement to become a net zero carbon company, and I totally missed it, because the pandemic has ruined my brain. We’ll come back to this on a later issue of the newsletter, but I’ll point out that Shell claims most of its reductions will come from consumer demand. In other words, Shell is claiming individual consumers must reduce their consumption before they reduce their supply. Cool!)

Specifically, one investor asked whether increased investment in renewables meant lower profits for Shell’s investors.

Van Beurden assured the investor that “the businesses of the future” could be more profitable than businesses like offshore oil drilling—“if you look at the full cycle costs.”

“Many of our businesses...indeed do have the benefit of more compelling economics [when we decide to invest], but also come with a lot of associated costs,” he told investors. “In my mind, the jury is still out.”

But Shell is also doubling down on fossil fuel investments. 

While the jury deliberates, the balance of Shell’s investments show they’re not actually investing that much in renewable projects.

Seventy-two of the 76 projects currently under construction or being looked at for future investment by Shell are fossil fuel-related.

Shell has also failed to meet its clean energy spending targets, and a breakdown of capital spending shows includes categories for gas, drilling/exploration, oil products, chemicals, and corporate investments, but no category for renewable energy investments.

Shell has no idea what it’s going to do with the $10 billion it took from investors.

At one point during the call, an investor had a simple question: where will this extra $10 billion go? “I’m not entirely clear on what you plan to do with the money,” Christian Malik from JPMorgan said. “Is it all to reduce debt?”

The answer from Shell’s top financial executive was illuminating. You don’t need to be a financial analyst to understand when someone is avoiding answering a question, and Uhl’s answer is a great example of using a lot of words to avoid saying anything.

Here’s his full answer:

The intent of the additional cash that will be available—first and foremost this decision is driven by the current circumstances we’re operating in, which is one of very negative on our financial outlook of 2020 and a high degree of uncertainty going forward. So it starts from a position of how do we ensure financial resiliency and strength, and manage risk, and that’s really the starting point. Beyond that, we have to operate with a strong balance sheet, to operate within AA credit metrics, to ensure we have the financial capabilities to invest and create value today and going forward, and ensure the longevity of our cash flows, so that’s going to require us to continue to invest in CAPEX, to invest in OPEX to grow our business and to reshape our business for the energy transition. If we do both of these things well, we will then generate sufficient wealth to increase dividend per share, execute share buybacks over time—and we need to achieve all three of those things. If conditions improve, we will continue to balance all three of those objectives. We need to make sure we have a strong balance sheet, we need to make sure we’re making the right investments for the company, and ultimately we need to provide compelling, leading returns for our shareholders.

If you didn’t read the whole thing, that’s ok. It literally doesn’t mean anything.


Our takeaway: Shell has no clue what’s going on

When it comes to predicting the future of how the energy sector will look after the pandemic, Shell’s oil executives appear just as clueless as anyone else.

The contradictions in their investor call were numerous—and there was no clear path outlined to a transition away from fossil fuels, despite Shell’s bold pledge to do so.

Indeed, the lack of clarity in the call and numerous contradictions, combined with the uncertainty regarding the $10 billion in withheld investor payouts, has caused some top investors in the company to call for replacing van Beurden as CEO.

Clearly, more upheaval in this industry is coming—which will certainly have implications for the climate crisis.

Fortunately, more quarterly earnings calls are coming, too. Want Chris to keep listening? Let him know—he runs HEATED’s fossil fuel ad submission email address, fossilfuelads@heated.world.

Also, submit fossil fuel company ads you see there, will ya?

*A previous version of this story incorrectly said 90,000 barrels, not 900,000 barrels.


For subscribers: don’t forget about book club tomorrow!

Briefly, before we sign off for the day, I wanted to remind paid subscribers that we’ll be holding our first book club discussion thread tomorrow at 12 p.m. EST on “Braiding Sweetgrass” by Robin Wall Kimmerer.

Here’s how it’ll work. I’ll send a discussion thread email out with three question prompts inspired by the book. I’ll then write my personal answers to each prompt in the comments.

You can choose to respond directly to my answers, or create your own separate comment responding to one of the prompts. Please note which prompt you are replying to at the top of your comment, and please only respond to one prompt per comment. (So, if you’d like to respond to all three prompts, post three separate comments).

Again, I’ll kick things off at 12 p.m. EST, to give our friends on the west coast some time to participate when it starts. I’ll remain active in the thread until 2 p.m. EST.

Hope to see you there—and thanks for supporting the newsletter!

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