The world has started to talk more seriously about shifting toward lower-carbon options to help slow the pace of global warming. That has put some sectors in a precarious position, most notably the energy companies that provide the world with oil. However, European integrated energy giants BP (NYSE: BP), Royal Dutch Shell (NYSE: RDS.B), and Total (NYSE: TOT) are actually shifting along with the times. And as they do, the entire notion of what it means to be an energy company is likely to change forever.
The olden days
Oil has been a major engine of growth for a very long time, and there is a complex value chain from the upstream (drilling), through the midstream (pipelines), to the downstream (chemicals and refining). Although there are companies that focus on each of these sectors, the biggest names in the energy industry include all of them in their businesses. That's where the term "integrated" comes from. These colossal companies have helped to power the world and will continue to do so for years to come.
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While some might like to see a quick shift toward renewable power and electricity, replacing oil and natural gas is a massive undertaking because of how integral they are to the economy. So the world is likely to keep using these vital fuels for decades to come. That's why ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) have largely avoided making any major changes to their businesses. Yes, they have clean energy efforts on the fringes, but nothing central to their operations. In fact, investors are so worried about this that dissident shareholders with an ESG focus recently won two seats on Exxon's board.
In Europe things are more than a little different. In 2020 both BP and Shell used the low oil price environment resulting from the coronavirus economic shutdowns to cut their dividends and redefine their futures. Total is working in the same direction, but has chosen to hold the line on its dividend, which it views as an important component of investor return. While it is too soon to tell which of their three approaches is correct (in the end, all of them might work), it is clear that the European integrated oil majors are trying to shift along with the times.
Some new numbers
In the effort to change from within, and ensure an ongoing business in a post-carbon energy world, BP has set a goal to shrink its hydrocarbons business by 40% between 2020 and 2030. That's a massive drop, with a 20-fold increase in the company's renewable power generating capacity and a 10-times increase in EV charging stations as key pieces of the puzzle. In 2030, oil and natural gas will still be very big businesses for BP, but the company's clean energy operations will be increasingly important. The big goal, however, is that oil will help to fund this transition.
Shell's goals are going in the same direction. It wants to get to net-zero carbon emissions by 2050, with a 20% reduction by 2030 and a 45% reduction by 2035. It wants to double the amount of electricity it sells by 2030, increase the low-carbon fuels it produces (hydrogen and biofuels) eights times over, let its oil production decline up to 2% per year, and increase natural gas (considered a transition fuel) production to 55% of its hydrocarbon mix. Once again, the direction is the key factor, with higher carbon energy sources helping to fund the transition toward a cleaner corporate future.
All of that said, a recent court loss could throw a wrench into Shell's plans, as it requires the company to hit the 45% reduction target by 2030. Shell intends to fight the order, but there's no telling what the final outcome will be or the timing of such a decision. Still, even if Shell loses it just means its clean energy plans get forcibly sped up. So the direction the company is moving in won't change. A loss, however, could have an impact on other companies' plans if it sparks a legal trend. This case isn't changing anything just yet, but should probably be monitored.
Total is taking a slightly different approach, including the intention to maintain its dividend while it is expanding its clean energy footprint. By 2030 it wants to triple the size of its "electrons" business, with EV charging stations, renewable power, and owning electric utilities all playing a part in the story. However, it is also working to increase its energy business as well. The key, however, is that oil is expected to fall from 55% of the company's operations to 35% (including biofuels) with natural gas expanding from 40% to 50%. The rest of its sales are slated to come from the growing electrons operation, which will see capital spending double by 2030. This is more of a middle of the road approach, when you consider the path that Exxon and Chevron are currently on.
The new energy majors
Basically, this trio of European energy companies is looking to expand the definition of energy to include electricity. That could be a first step in a long-term business model shift that eventually results in electricity being the more important piece of the business. However, they are in effect addressing the very real issue of transition cost by using their oil operations to fund their shifts. Don't underestimate the power that BP, Shell, and Total have to effect change in the world. They could prove to be among the most important clean energy companies at some point, and perhaps sooner than many expect.
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